Surveys convey mixed messages on health of West Midlands economy

CONFIDENCE among West Midland businesses fell for the first time in six months in August, a new survey suggests.

The latest Business Trends report by BDO brings to an end the recent bullish streak by businesses and the authors claim could have a knock-on effect for interest rate rises.

However, doing its best Hitchhikers Guide to the Galaxy impression, the report suggests there is no need to panic.

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

Although small, BDO said drop gave an 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 Eurozone is likely to have contributed to this fall as the sector relies heavily on exports to European nations.

A 0.1 point rise in the sub-index for the services sector did not provide enough upward momentum to offset the drop in manufacturing, even though services firms account for over three quarters of the economy.

The BDO Output Index, which predicts short-term growth expectations, remained broadly stable at 103.8, rising from 103.7 in July. BDO said this modest rise provided further proof that the speed of growth would level off, having shown strong acceleration over the earlier part of the year.

Defying evidence of cooling activity in other indices, the BDO Employment Index, which predicts companies’ hiring intentions over a three month horizon, grew strongly from 109.6 to 111.2 in August.  This is the seventh month in a row that the Employment Index has risen, suggesting that the unemployment rate could soon return to pre-crisis levels.

Commenting on the findings, Richard Rose, partner and head of BDO in the West Midlands, 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 – the Eurozone – 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.”

Another important economic barometer for the region, the Lloyds Bank Commercial Banking PMI report painted a slightly more optimistic picture of the region’s economy.

It said that output during August rose at its fastest rate in three months, supported by a sharper increase in new business. Job creation eased slightly but remained marked, while there was another build-up of outstanding business. Input price inflation accelerated to a six-month high, but output prices decreased marginally.  

The Lloyds Bank West Midlands Business Activity Index – which measures the combined output of the region’s manufacturing and service sectors – registered 57.7 in August. The latest reading was up from 55.8 in July and the highest in three months. That said, the authors said the region posted a slower expansion of activity than the UK average.  

The level of new business placed with private sector companies in the West Midlands increased further in August. Moreover, the rate of expansion quickened since July and was stronger than the UK average. Panel members commented on improved demand and client confidence as factors underpinning the latest rise in new orders.

Employment rose for a 20th consecutive month in August, as firms hired additional workers in line with increased workloads. The rate of job creation remained marked, despite easing to the slowest since May.

Mark Cadwallader, area director SME Banking in the Midlands, Lloyds Bank Commercial Banking, said: “The West Midlands economy delivered another robust performance in August, although output growth remained below the UK average. Further strong intakes of new business bode well for the coming months, while rising backlogs of work encouraged firms to continue to expand their staff numbers. However, competitive pressures remain strong, leading to a slight reduction of output prices despite rising input costs.”