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Andrea Bishop of BDO

Steep drop in manufacturing growth expectations in South West

Manufacturers across the South West have recorded their steepest fall in output expectations since May 2013, according to figures released this week.

The fall came as a faltering global economy and worsening geopolitical developments rocked short-term growth expectations for the sector, according to the latest Business Trends report by BDO.

The BDO Output Index, which predicts businesses’ growth expectations over the next three months, fell from 103.8 in August to 103.3 in September. This modest drop masks a sharp fall of 1.6 points in the BDO Output sub-index for manufacturers, which fell from 113.2 to 111.6.

Although the reading remains well above the 100.0 mark, indicating long-term growth, the findings suggest that a number of factors are undermining orders from manufacturers, which are vulnerable to international developments due to their reliance on exports. These include collapsing sentiment in the Eurozone, a faltering US recovery and geopolitical concerns.

Weak and uneven global demand is also reducing cost pressures on businesses. The BDO Inflation Index fell for the fifth consecutive month to 96.6 in September – just above the 95.0 mark that separates inflation from deflation. In addition to falling commodity prices caused by disappointing global growth, prolonged low wage growth is limiting upward cost pressures on labour-intensive services firms.

In sharp contrast to this gloomy outlook, the BDO Employment Index recorded its 13th consecutive rise in September, with hiring intentions reaching a new post-crisis high of 112.3, up from 111.2 in August. This indicates that the recent trend of falling unemployment is likely to continue, with firms expecting to increase hiring towards the end of the year.

Commenting on the findings, Andrea Bishop, audit partner and head of BDO, said: “With global conditions becoming increasingly challenging, it was only a matter of time before the stellar increases in economic growth recorded earlier this year came to an end.

“Given their reliance on exports, manufacturers have borne the brunt of weakening global demand but the effects of stuttering worldwide growth are obvious throughout the economy.

“The most noteworthy effect is falling cost pressures. Although presenting good news for company profits, on an economy-wide scale the trend is worrying as it brings the economy closer to the deflation scenario that has spooked European policymakers recently.

“While we have more breathing space than the Eurozone, inflation has been falling for some time and Mark Carney will be hoping to see some upward cost pressures soon. However, at least this means the Bank of England can hold off from raising interest rates and focus on promoting growth.”