Business Weekly - Cambridge, UK

BDO's lead partner in the Eastern region, Gary Ives

 The latest Business Trends report from the EoE firm shows further decline in the BDO Output Index, which indicates business confidence one quarter ahead, from 100.4 in November to 100.1 in December.

This is the fourth consecutive month of decline and further evidence that the impact of the credit crunch continues to weigh heavily on the UK economy, BDO said.

Significantly, the fall in the Output Index was driven by the service sector, which has fallen from 100.6 in November to 99.5 in December, indicating that these companies expect growth over the next quarter to be below the UK’s long term trend rate of 2.5 per cent – 2.75 per cent.

This is the first time the service sector index has fallen below 100 since October 2005 and although the level of growth expectations still remain at a reasonably healthy level, the second half of 2007 saw consistent and marked falls in this measure from its very high levels in mid year, demonstrating that the UK service sector is struggling to stave off the effects of a slowing economy.

Despite this, overall the Output Index is hovering just above 100 points indicating that, perhaps surprisingly, UK business still expects above trend growth over the next three months.

This has been largely supported by the manufacturing sector, where the Output Index rose strongly from 99.9 in November to 102.4 in December. Manufacturers have responded positively to last month’s rate cut, perhaps indicating that they expect lower interest rates to give them some respite from the recent strength of sterling.

Further concerns are raised by the stubbornly high Inflation Index which rose from 106.4 in November to 107.3 in December, after briefly falling last month. With the index at this level, prices would be expected to grow at an annualised rate of 2.8 per cent in the first quarter of 2008.

“With business confidence falling, particularly in the service sector, we believe further rate cuts are necessary during the first quarter of 2008," said Gary Ives, Lead Partner at BDO Stoy Hayward LLP in the Eastern region.

"Although inflationary expectations remain high, there is evidence that these will ease as 2008 progresses, giving the Monetary Policy Committee some slack to give the economy a boost by cutting rates."

"We suspect that the MPC will gauge consumer confidence during the crucial January sales period before cutting rates in February."

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