16th August 2010

The economy may be heading for a double-dip recession, with fiscal and monetary policies unlikely to spur recovery for the UK, according to the latest Business Trends report by accountants and business advisors BDO LLP. The Optimism Index, which is a good indicator of GDP growth two quarters ahead, expects growth to drop markedly as we move through 2010, falling towards zero in Q4 and entering 2011 on a strong downward trend. The Business Trends indices comprise data from over 11,000 respondents employing approximately five million people in the UK. Following the Bank of England’s downward revision to its growth forecast, this month’s figures provide a clear indication that a double dip could be on the horizon.

The Output Index, which measures corporate order books, also shows a marked drop from 101.6 in June to 99.8 in July. Given the noticeable falls seen in the Optimism Index over the last few months, this suggests that declining business confidence has begun to feed its way through into lower levels of economic activity over the last month or so.

Despite a slight improvement in the employment Index, weak earnings growth, consistently above target inflation and unemployment mean consumers are unable to lead a recovery. Similarly, fiscal policy that entails looming public sector cuts will be a drag on growth in the near and medium term.

Peter Hemington, Partner, BDO LLP commented: “The BDO Optimism Index has been falling sharply for some months now and, as we would expect, this has now begun to feed into what UK businesses are saying about current activity levels. Given the severity of our indices’ downward trajectory, we now believe that there is a substantial risk of the UK falling into a “double dip” recession in early 2011.

"There are two calls to action that arise from this. First, the government’s path on reducing spending is now well set. But as we go through the autumn and detail of spending cuts become clearer, it would be helpful if the temptation to talk up the cuts was resisted and instead a measured tone about the place of government spending in a modern economy was adopted. Second, we believe that the Bank of England now has good grounds for a £50 billion addition to its quantitative easing programme.”