UK Economy ‘Stronger in New Year’

UK businesses are set to prosper during the New Year, after having weathered the storm of a consumer downturn and rising oil prices, a report suggests. Although output has dipped slightly, business confidence has enjoyed a healthy rebound since July, say researchers at BDO Stoy Hayward.

They also say the Bank of England will keep interest rates on hold this month. However, the CBI warns there will be more job losses in manufacturing due to high energy prices and falling orders.

A survey from the business leaders’ organisation said that of 654 firms questioned showed, 10% think they will have to reduce staff numbers. “Higher production costs as a result of rising charges for energy, oil and raw materials, coupled with stagnant output prices mean that smaller manufacturers are being squeezed at both ends,” said Hugh Morgan Williams of the CBI.

He said that orders fell for the third successive quarter, and companies could did not see any improvement in the final quarter of the year and added, “Worryingly, few firms are forecasting any signs of recovery, while one in three are more pessimistic about the coming 12 months than in the summer.”

However, the latest BDO optimism index – an indicator of GDP growth two quarters ahead – rose from 100.4 in July to 101.2 in October. BDO says this implies economic growth of just over 3% in the second quarter of 2006.

“The UK economy is looking healthy for the beginning of 2006,” said BDO Story Hayward’s Peter Hemington.
“Business confidence is up, helped by the fact that interest rates fell by a quarter of a point in August.”
It also says that uncertainty over oil prices mean interest rates should not change over the winter.

However while there was growing confidence in the service sector, that was not matched by the UK’s manufacturing industries. Similarly there was a disparity in the outputs of the sectors, with the service sector helped by August’s rate cut, but manufacturers were hit by interruptions to order flows from the US.
‘Rebound expected’

The BDO report says there are no signs of a UK recession, but neither are there indicators of “a return to the trend growth of around 3% that would enable the Chancellor to achieve a significant reduction in public borrowing”.
Meanwhile, the BDO inflation index has increased from 101.7 in July to 104.8 in October, implying that the Consumer Price Index (CPI) will continue rising at a rate close to the current rate of 2.5%, and above the Bank’s 2% target for some time.

Douglas McWilliams, chief executive of the Centre for Economics and Business Research said “the economy faces continuing uncertainty over the coming months” because of energy costs and US hurricane damage.
“Currently UK businesses are expecting a rebound in growth in 2006, but if prospects start to deteriorate, this quarter’s rise in the inflation index may make it more difficult for the MPC to cut rates.”