The latest BDO Business Trends Report published shows that UK businesses are continuing to reap the rewards of healthy domestic demand and the improving world economy. And whilst inflationary pressures are slowly rising, inflation is unlikely to accelerate significantly over the next twelve months.
Yet with weak consumer spending in the run up to Christmas, BDO Stoy Hayward predicts that the Bank of England’s Monetary Policy Committee (MPC) will keep interest rates on hold this month. And with household purse strings predicted to tighten further, BDO Stoy Hayward expects interest rates to remain unchanged during the first quarter of 2004.
According to this month’s poll of polls, both the BDO optimism and output indices show that whilst economic growth is accelerating, the pace of development is likely to fall short of the Chancellor’s optimistic growth projections of between 3 and 3.5 per cent in 2004.
The BDO optimism index – an indicator of GDP growth two quarters ahead – saw further improvement in December. The index edged up 0.2 points to 100.1, indicating economic growth of 2.3 per cent during the second quarter of 2004. Businesses confidence edged up 0.1 point to 100.0 for businesses in the service sector, indicating that the sector’s firms are shrugging off fears over high levels of consumer debt and are expecting a strong first half in 2004.
Meanwhile, the BDO output index – which relates closely to GDP movements a quarter ahead – also increased 0.3 points to 100.3, implying annualised growth of 2.3 per cent in the first quarter of 2004.
The BDO inflation index edged up 0.1 points in December to 96.4, following November’s 0.2 point fall. With inflationary pressures rising, albeit at a relatively low rate, BDO Stoy Hayward expects inflation to increase above its current level of 1.3 per cent on the Bank of England’s new target measure – the Consumer Price Index. However, these pressures are not expected to push inflation significantly above the 2 per cent target.
Chris Grove, partner at BDO Stoy Hayward said: "The latest poll of polls indicates that economic growth is set to return to levels not seen since 2000. However, Gordon Brown’s latest projections seem somewhat optimistic. While business confidence and output are growing, consumer spending looks to be slowing, and we therefore expect the MPC to adopt a ‘wait and see’ approach, keeping interest rates on hold throughout the first quarter of 2004."
Douglas McWilliams, chief executive of the centre for economics and business research said: "Economic recovery overseas is continuing to have a positive impact on UK firms. Faced with the new target measure for inflation, we expect the MPC to keep rates on hold this month, providing a further boost for business."
