New research: UK business climate is set to enter 2018 with improved health

Tony Nygate, BDO

The UK business climate is set to enter 2018 with improved health, according to forecasts in a new quarterly report by accountancy and business advisory firm BDO.

Launched today, BDO’s Industry Watch is a quarterly economic measure of the health of the UK business climate.

In the last quarter, the Industry Watch gauge moved from -22 to -4 [within a scale of -50 to +50] for the UK economy as a whole. Although still in negative territory, the latest data shows an improving environment for UK businesses.

Looking ahead, Industry Watch forecasts that economic conditions could rise to +5 by the end of the year – marking the first time in 2017 that the UK business climate has been in positive health.

Several economic indicators drove improvements in the business climate. This included business confidence, which strengthened significantly in the second quarter, as well as the minor uptick in GDP growth seen over Q2 and continuing employment levels. Lending – a key aspect of business climate – also increased in the most recent data (Q2).

Private sector drives growth

Industry Watch also monitors the health of seven key UK economy sectors: manufacturing, retail & wholesale, real estate & construction, business services, financial services, technology and communications and the public sector.

Q1 2017Previous Q2 2017Current Q3 2017Forecast Q4 2017

Forecast

BDO Industry Watch reading (UK economy) -22 -4 -1 +5
Manufacturing +6 +10 +17 +26
Retail & Wholesale -29 -8 -2 +2
Real Estate & Construction -20 -10 -9 -6
Technology & Communication -26 -5 +9 +26
Business Services -15 +7 +5 +19
Financial Services -20 -9 -10 -7
Public sector -2 -7 -7 -8

All private sectors saw an improvement in the most recent quarter for which data is available, while the public sector dropped five points (from -2 to -7).

Employment in five of the seven constituent sectors rose from the first to the second quarter of 2017, and total lending to business rose slightly, all contributing to a largely benign business environment.

Manufacturing, which was the only sector with a positive score at the beginning of the year, improved its score again, driven largely by an increase in lending.

However, it was businesses in the technology/communications and retail/wholesale sectors which made the largest improvements in industry health, jumping 21 points each between Q1 and Q2.

But positive gains remain fragile

Despite the positive moves, several factors, including low productivity and concerns around consumer spending and Brexit remain considerations. The overall Industry Watch gauge remains negative (-4), signifying that business conditions remain below long-term trends.

While all seven sectors are now out of the ‘red zone’ – which is between -11 and -50 on the Industry Watch gauge, most remain in negative territory.

Though it has shown some improvement, real estate and construction was the weakest performing sector in Q2, caused largely by reducing employment and an uptick in insolvencies.

Tony Nygate, BDO business restructuring partner, says: “The latest data shows an improving environment for UK businesses, and it is particularly encouraging to see the forecasts for the remainder of the year are positive across most sectors.

“Lending and investing is still happening and, with interest rates remaining at historic lows, the business environment is largely benign. Companies are still facing challenges but we are seeing situations where struggling businesses have been able to refinance and secure re-investment, where historically we might have expected them to face failure.

“However, few would argue there will be bumps in the road as economic uncertainty and Brexit turbulence persists. One concern is that there remains a significant number of companies operating with substantial debt and are unable to adapt to the changing environment. While some of these so-called ‘zombie companies’ may yet be attractive investment targets, this very much depends on how flexible stakeholders are able to be.

“Recent hints at an upward movement of interest rates will provide food for thought for many. So, while the immediate picture is largely benign, now is not the time for business to alter the course of prudence.”