UK economy on edge of contraction

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Despite a gloomy outlook, an easing of inflationary pressures may save the day, says BDO

The UK economy stands on the edge of contraction, with businesses’ turnover expectations falling for the fourth month in December. However, easing inflationary pressures may prevent this, according to the latest Business Trends report by accountants and business advisors BDO LLP.

The overall forecast for the UK economy remains bleak. BDO’s Output Index dropped for the seventh consecutive month to 91.4 in December, from 92.5 in November. The Index, which measures turnover expectations three months ahead, has now remained below the crucial 95.0 mark that indicates growth since July 2011.

Meanwhile BDO’s Optimism Index – which predicts business confidence in two quarters’ time – dropped to 91.5 in December from 92.5 in November. This move away from the 95.0 mark heads dangerously towards the low figures seen at the turn of 2008- 2009 when the UK was gripped by recession.

While the outlook is gloomy, BDO said an easing of inflationary pressures may help prevent the economy “falling off the precipice”.

For the fifth consecutive month, BDO’s Inflation Index came down, with December’s figure only marginally higher than at the start of 2011 (a 1.6 point increase). The decrease in the Inflation Index is welcome news for consumers, who will consequently feel less of a squeeze in 2012.

Peter Hemington, partner at BDO, said: “It is apparent 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 urged the Bank of England to consider more quantitative easing and banks to step up lending to business to prop up the economy.

The report follows predictions on Thursday from the National Institute of Economic and Social Research (NIESR) that the economy grew just 0.1pc in the last three months of the year.

The report echoed chancellor George Osborne, who insisted last week there were “signs” the economy was turning a corner with borrowing coming down, jobs were being created in the private sector, and inflation falling.

It said inflation expectations fell back for a fifth month in December and were not back in line with where they were in February – but high oil prices remain a worry.

Hemington said the government should introduce more measures to encourage private sector investment in infrastructure.

He said: “We welcome the investment in high-speed railways, but want to see more immediate measures introduced – 2026 is a long way off. 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.”