Ukraine crisis and weak euro zone hit confidence levels

BOSSES’ confidence has taken a knock due to the poor economic performance in the euro zone and the ongoing diplomatic crisis the Ukraine.

The fall in business optimism in August, the first decline in six months, is reported in BDO’s monthly Business Trends survey, and the firm believes this could further delay moves to start increasing interest rates from their historic low of 0.5%.

The BDO Optimism Index, which predicts businesses’ growth expectations over the next six months, is still well above the 100 mark that indicates long-term average growth, however it fell slightly for the first time in six months to 105.0 in August (from 105.1 in July).

Although small, the drop gives a firm indication that economy-wide growth may plateau during the remainder of 2014, driven mainly by a decline in manufacturing optimism which fell from 119.9 in July to 118.8 in August. Weak demand in the euro zone is likely to have contributed to this fall as the sector relies heavily on exports to European nations.

Despite the fall in confidence, it was not all bad news as the BDO Employment Index, which predicts companies’ hiring intentions over a three month horizon, grew strongly from 109.6 to 111.2 in August.

Commenting on the findings, Tim Entwistle, partner and head of BDO in the North West, said: “After a strong start, the rest of 2014 is looking less certain for businesses, with manufacturers being most affected.

“With anaemic growth enduring in our key trading partner and external shocks such as the crisis in Ukraine further dampening confidence, no one should be surprised to see growth impacted in the second half of the year.

“An important knock-on effect in this regard relates to the Bank of England’s deliberations around interest rates. With weak demand in Europe keeping cost pressures on firms very low and domestic threats such as an overheating housing market seemingly largely under control, there seems to be very little in the short term that would necessitate an interest rate rise. The consensus is that rates will rise in Q1 2015. However, it would be no surprise if this moves back to later in 2015.”

Meanwhile there was more positivity Lloyds Bank North West Purchasing Managers’Index, which showed private sector output growth at a 10 month high.

The August data signalled that business activity in the North West private sector picked up at the quickest rate since October 2013. Underpinning expansions in output was further solid growth in new orders and employment.

Martyn Kendrick, area director SME Banking in the North West, Lloyds Bank Commercial Banking, said: “Private sector business conditions continued to improve strongly in August across the North West. Strong expansions in activity were also supported by another increase in workforce numbers, although the rate of hiring slowed from previous months.

“A cautionary note was provided by rising inflationary pressures. However, based on current trends, the North West looks set to experience a continued upturn in both the manufacturing and services sectors through the remainder of 2014.”