Boost for businesses as costs finally enter deflation

By Anita Jaynes on 9 March, 2015

Businesses are seeing overall cost deflation for the first time since 2009, giving companies cheaper input costs to support growth, according to the latest Business Trends report by Bristol-based accountants and business advisers BDO LLP.

As predicted by BDO last year, the Inflation Index descended into deflationary territory in February, falling below 95 to 94.7 – the dividing line which denotes deflation. This drop is primarily due to the huge fall in crude oil prices now feeding through to input prices for many businesses. This is good news for companies, particularly manufacturers, as a reduction in energy prices and other commodities ease pressure on the bottom line.

Steady growth in the economy is expected to continue into mid-2015, with BDO’s Output Index edging up from 102.9 to 103.1 this month, well above the 100 mark that represents expansion.

The positive outlook doesn’t end there as business confidence and companies’ hiring intentions also remain high. BDO’s Optimism Index held steady at 104.9 in February (up from 104.4 last month), indicating that uncertainty around the General Election has not swayed confidence in continued growth over the next six months. In addition, the Employment Index jumped to 113.1, from 111.6 in January, pointing to sustained job creation at a relatively rapid rate. These expectations are reflected more broadly in the falling UK unemployment rate and shrinking pool of unemployed workers, meaning that workers will start to benefit from real wage growth this year.

Commenting on the findings, Andrea Bishop, audit partner and head of BDO LLP in Bristol, said: “Businesses are well placed to take advantage of falling costs, to help them to bed in growth.

“Lower input prices will help entrench the recovery, as consumers gain more spending power.  However, the economy still has substantial spare capacity. Spending on infrastructure is one of the most effective ways to push the economy back toward full employment and keep the recovery on track. Government debt is cheaper than it’s ever been, and now, with falling raw material costs, there is a fantastic opportunity for increased public sector investment. As we head towards the Budget, the Chancellor needs to do more to capitalise on this for the benefit of all of us.”

Pictured above: Andrea Bishop, audit partner and head of BDO LLP in Bristol