Six-month cycle of growing optimism is broken

John Duncan, Superconnected Leeds Bradford business development officer, at Tower Works, Leeds

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 for the first time in six months to 105.0 in August, down from 105.1 in July.

BDO said 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 Eurozone is likely to have contributed to this fall as the sector relies heavily on exports to European nations.

Terry Jones, partner and head of BDO in Yorkshire, 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.”

He said that the fall in confidence will have an important knock-on effect on the Bank of England’s deliberations around interest rates.

Prior to the weak data, there were expectations that the Bank would raise interest rates in early 2015.

“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,” said Mr Jones.

“The consensus is that rates will rise in the first quarter of 2015. However, it would be no surprise if this moves back to later in 2015.”

BDO said 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.

It said this modest rise provides further proof that the speed of growth will 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.

BDO said 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.

The report coincided with the latest Lloyds Bank Commercial Banking Yorkshire and Humber PMI data, also out today, which showed that employment in Yorkshire and Humber rose for the 15th successive month in August, with around one-quarter of panellists noting a rise in comparison to the previous month.

Firms cited strong turnover growth and business development as the key drivers behind the latest increase in payroll numbers.

Lloyds reported one of the fastest expansions of business activity in the series history in August.

This was supported by sharp new order growth and rising employment.

Inflationary pressures accelerated in August, while charges increased as firms passed on their cost burdens to their customers.

The index registered at 60.8 in August, up from 58.4 in July and the highest since December 1999.