Output slumps to four-year low as economy contracts
UK business output has slumped to a four-year low, with many firms expecting orders to decline, according to a new report.
In its latest Output Index – which indicates how businesses expect their order books to develop over the next three months – BDO said the figure had fallen to 94.9 in June from 95.4 in May, dropping to the point of contraction, which is below 95.0.
Growth in existing order books has been slowing since the end of summer 2015 and BDO said this was indicative of an even weaker Q2 following subdued growth at the start of the 2017.
It said the poor performance of the UK services sector, which makes up the majority of the UK economy, continued to stunt economic growth.
Although the manufacturing sector has shown some signs of growth for the last six months, the Manufacturing Output Index dropped 0.1 points in June to 97.6. This still indicates the sector is growing but below the long-term trend of 100.
BDO said considering that UK manufacturing contributes only 15% of the total UK GDP, this is currently well below the level of growth required to offset the services sector’s slowdown.
Despite the Output Index suggesting limited current growth, BDO’s Optimism Index – which indicates how firms expect their order books to develop in the coming six months – signals a much brighter future.
The Optimism Index increased to 102.9 in June, up from 102.8 in May.
The data is consistent with the latest Lloyds West Midlands PMI, which shows output increased sharply at the end of Q2, with the value of goods and services produced by the region’s economy growing faster than in any other UK region.
According to Lloyds, the West Midlands PMI rose to 58.1 in June from 56.5 in May.
It concludes the rate of expansion in new orders at West Midlands companies was the fastest of all the UK regions covered. This was despite growth in the region easing to a seven-month low.
Employment, meanwhile, continued to rise sharply in line with increasing workloads, with the rate of job creation little-changed from that seen in May.
Mark Cadwallader, regional director for the West Midlands at Lloyds Bank Commercial Banking, said: “The West Midlands was the star performer in the UK during June, leading growth of both output and new business. A faster expansion of business activity was a welcome sign, following a slowdown in May. Buoyant trends in workloads supported optimism among companies and encouraged them to increase their staffing levels further.”
BDO said the eight-point difference between its optimism and output indices was the largest on record. It implies that UK businesses are expecting a flurry of business activity following the political uncertainty in June, which left many businesses delaying investment plans.
BDO said consumers would be hopeful that the anticipated increase in activity would filter through to wage growth. BDO’s Inflation Index dropped from 105.0 to 104.8 in June but it said inflation remained a key concern for households with consumer price inflation currently outpacing wage growth.
Commenting on the findings, Richard Rose, Midlands Tax Partner, BDO, said: “Since the financial crisis, the UK’s economic recovery has been reliant on consumer spending and a growing services sector. For the past two years now we have witnessed both a decrease in the performance of the services sector, as well as a reduction in consumer spending, which has become more pronounced after the devaluation of sterling.
“To deal with the pressures of rising inflation and to accelerate economic growth, the UK’s monetary policy makers are seriously considering raising interest rates. However, given the economy’s clear weakness and the continuing uncertainty we are going to see from Brexit, to raise interest rates at the moment would be a major mistake.”
