UK economy hovering over precipice

Latest Business Trends report from market watcher BDO notes falling business confidence, but inflationary pressures are easing to give a glimmer of hope

The UK economy is hovering on the edge of recession, according to the latest research from market watcher BDO LLP.

In a distinctly gloom-filled Business Trends report, the firm said business turnover expectations fell further in December. However, easing inflationary pressures may stop the economy from falling off the cliff, it said.

Overall, the country is facing a bleak outlook, BDO warned, with its Output Index dropping for the seventh consecutive month to 91.4 in December, from 92.5 in November – significantly below the vital 95.0 mark that indicates growth since July 2011.

In further misery, the firm said its Optimism Index – which predicts business confidence in two quarters’ time – dropped to 91.5 in December from 92.5 in November. BDO said this move away from the 95.0 mark "heads dangerously" towards the low figures seen in 2008/9 when the UK was in the grip of the recession.

The one ray of light was the drop in the BDO Inflation Index, with December’s figure just slightly higher (1.6 points) than the start of 2011. This bodes well for consumers, who will feel "less of a squeeze" in 2012, BDO claimed.

Peter Hemington, partner at BDO LLP, called for more quantitative easing from the Bank of England.

“As our data shows, there are areas for cautious optimism in the year ahead, but it is apparent that the UK economy has reached a crunch point. The government must respond decisively if the UK is to avoid a period of prolonged contraction,” he said. “To arrest the forecasted slump, we urge the Bank of England to consider a further round of quantitative easing, and we encourage the banks to continue to step up their lending to UK businesses.

“We also want to see the government introducing measures in 2012 that encourage private sector investment in infrastructure. We welcome the investment in high-speed railways, but want to see more immediate measures introduced – 2026 is a long way off. And we remain of the view that the government’s attempts to rein in current spending have given it the credibility to be bolder in borrowing more to finance infrastructure spending,” he added.

Backing up BDO’s findings were the latest set of figures from the National Institute of Economic and Social Research.

In its January 2012 figures, the think tank said GDP output grew by 0.1 per cent in the three months ending December 2011 – meaning the economy expanded by a total of one per cent in 2011, less than half of the 2.1 per cent growth seen in 2010.