Freefalling business confidence paves way for downwards growth revision

Talk of cuts provokes record fall in optimism

New findings from the latest BDO Business Trends report add to the pressure on the new Office of Budget Responsibility to dramatically lower government growth forecasts. BDO, believes that 2011’s growth forecasts now need to be revised down to between 1.5 and 2.5 per cent from the 3.0 to 3.5 per cent proposed by the last government. With the new body poised to announce its first forecasts later today (14 June), the report from accountants and business advisors BDO LLP shows a sharp drop in business confidence. The BDO Optimism Index has plummeted by an unprecedented 6.3 points, down from 103.3 in April to just 97.0 in May. This is the largest drop since records began in 1995 and points to a significantly weakened outlook for the recovery during the second half of 2010 and into 2011. BDO says that, as a result, economic growth is likely to remain below an annualised 1 per cent in Q4 2010. The previous government’s 2011 forecast for 3.25 per cent growth - while arguably always unrealistic - will now require a drastic downwards revision of growth prospects for next year and beyond. While the Business Trends report highlights the current lack of confidence among businesses, this contrasts sharply with their view of current order book strength, as the Output Index has remained above the crucial 100 mark at 101.1 which correlates to trend growth (2.5 per cent). This suggests that, although current orders remain robust, businesses are fearful of the future, perhaps as a result of the expected effect of public sector cuts on the economy and fears of contagion from the sovereign debt crisis in Eurozone. Kim Hayward, Lead Partner for BDO LLP in Southampton commented: “The government has understandably been keen to emphasise the extent of the sacrifices that we all will need to make as public borrowing is brought under control. But there is a significant risk that the rhetoric has begun to impact on business confidence, and fears of the economic impact of spending cuts may be causing businesses to rein back on growth plans. “It will be important for the government to tread a path between acting tough to cut the deficit while reassuring businesses that it is committed to restoring strong, private sector led economic growth.” - Ends –

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