UK Economy - sluggish recovery seen

A halt in the decline of inflationary pressures combined with poor results for BDO's Output and Optimism indices point to a sluggish recovery for the UK economy, according to the latest Business Trends report by accountants and business advisors BDO LLP.

BDO’s Inflation Index dropped by just 0.1 points in April, suggesting that the previously welcome downward trend in inflationary expectations over the past nine months is coming to an end. Worryingly, this levelling off sees the Inflation Index at 102.9, well above the average trend level of 100.0 (2.7%), suggesting that inflation is unlikely to reach the Bank of England’s 2.0% target by the end of the year.

These inflationary pressures, compounded by low growth in regular annual earnings at just 1.6% - below the inflation rate - are critically undermining consumer spending power, a key contributor to economic recovery.

Adding to consumers’ woes, trends in employment remain weak. While the BDO Employment Index did improve in April - climbing just above the important 95.0 level which indicates growth – it barely edged into growth territory (95.5) and remains well below the long-run trend rate of 100.0.

While there is a more positive view of the economy than six months ago, findings show that business people across the UK predict protracted slow growth for the UK economy for the remainder of 2012.  BDO’s Optimism Index – which predicts business performance two quarters ahead - fell from 96.7 in March to 96.2 in April. Although the index remains above 95.0, it moved further away from the crucial 100.0 mark that equates to average UK trend growth. Meanwhile BDO’s Output Index - which points to business conditions in one quarter’s time – stagnated, moving up 0.1 to 95.8, only just in positive territory.

Peter Hemington, Partner, BDO LLP, commented: "Given the public sector austerity measures required to reduce deficits, policy makers across the globe have reached for unconventional monetary policy tools to encourage growth. However, the UK has shown stubbornly high inflation and our findings suggest that business people predict inflation will continue above target - potentially a self fulfilling prophecy.

"Some economists believe that the Bank of England should convince businesses and consumers that it is prepared to tolerate inflation.  The thinking is that only this will convince consumers to spend and businesses to invest, as the alternative is to see the value of their cash assets decline.  If this is the strategy, then it may be the right one.  But it has not been articulated as such and the concern is that every day inflation continues above target, the Bank loses more credibility and has less room for manoeuvre."