Economy ‘on firmer ground from mid-year’

Although conditions remain tough, with the UK likely to enter a technical recession following contraction in the fourth quarter of 2011, the downturn is likely to be shallower than in 2008-9, it said.

BDO’s Optimism Index, which forecasts business confidence two quarters ahead, rebounded in January to 94.1 from 91.5 in December – the largest monthly increase since February 2011.

Although the reading remains below the crucial 95.0 mark that indicates growth, the data suggest that the economy could begin to recover in the second half of 2012.

The Optimism Index for the services sector has increased to 94.7 in January from 92.8 in December, hovering just below the growth mark. Similarly, the manufacturing Optimism Index jumped to 91.3 in January from 86.6 the previous month.

Inflationary expectations continued to drop in January, as BDO’s Inflation Index fell to 105.2 from 106.3 in December, returning the index to levels unseen since last February. This trend is likely to continue throughout 2012, with inflation expected to fall back to 2.8 per cent by March and reaching the Bank of England’s 2.0 per cent target by the end of the year, according to the report.

The short-term prospects for the UK economy overall, however, remain weak, it said. The Output Index – measuring turnover expectations three months ahead – fell for the eighth consecutive month to 91.2 in January from 91.4 in December.

The index has now stayed below the 95.0 mark for six successive months, pointing to contraction in the first quarter of 2012 and placing the UK in a technical recession. However, the decrease of just 0.2 of a point suggests we will not see the depths reached at the lowest points of 2008 and 2009.

Ian Beaumont, partner and head of BDO in Leeds, said: “Undoubtedly prospects for growth continue to be fragile, as we have already very likely entered a technical recession and the situation in the Eurozone remains difficult to predict.

“However, the marked increase in business confidence is an encouraging sign pointing to better times ahead.”