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UK output index reaches 96.7 in May

Good news for now, but anxieties remain for later this year.

The UK output index, which reflects the current experience of businesses and predicts GDP one quarter ahead, climbed to 96.7 in May from 95.8 in April, according to the latest business trends indices prepared on behalf of the accounting firm BDO by the Centre for Economics and Business Research (Cebr).

This is the third consecutive month that the output index has climbed above the 95.0 mark, which indicates growth. It stands at the highest level seen for a year. This figure suggests that Britain will experience growth from the middle of 2012.

Although short-term business prospects in the UK have improved, the eurozone crisis has cast a dark shadow over longer-term growth by undermining the country’s business confidence.

Conversely, BDO’s optimism index, which measures business performance two quarters ahead, has dropped for the third consecutive month, from a peak of 98.0 in February to 95.5 in May. The index suggests that UK businesses expect growth to tail off later in 2012.

Peter Hemington, partner at BDO, said:

Given that half the UK’s export goods go to the eurozone, it’s hardly surprising that the ongoing turbulence there is denting longer-term growth prospects here. The biggest issue for UK businesses at the moment is that the strength of the pound against the euro has made UK exports much more expensive, significantly denting export and growth prospects.

Against the backdrop of longer-term uncertainty, BDO’s employment index in May has also declined to 94.9. Its return to below the 95 level points to continued weakness in the labour market, indicating that employment may fall in 2012.

Hemington continued:

While the UK economy is currently doing "OK, considering", it’s clear that UK business people are worried by the eurozone crisis and are scaling back plans for hiring and investing. This massively threatens the already fragile growth prospects for the economy.

The government’s plans to shrink current spending by the state remain a necessity, but a fantastic opportunity is being missed to build high quality infrastructure cheaply, taking advantage of the very low borrowing rates that the government can source currently. More energy and imagination than we have seen so far is required to access this opportunity, with the key additional benefit this would bring in terms of stimulating growth and employment.  More of both are sorely needed at the moment.