The latest Business Trends report from BDO shows that business confidence is plummeting as growth in the manufacturing sector seems to have stagnated.

Businesses in the UK are now expecting to see very little economic growth in the coming six months.

The manufacturing output index, used to gauge advanced growth in the sector, has dropped to 93.9. This is below the benchmark level of 95 and therefore indicates the industry is contracting. It’s also the lowest recording since the economy started to emerge from the recession in October 2009.

The manufacturing optimism index has been below 95 for the last two months, suggesting the manufacturing sector will remain in a recessionary state into the beginning of next year.

The service sector is not faring much better. Although its index has not dropped below the 95 mark, it has been hovering just above for more than a year, indicating zero growth for the remainder of 2011.

Peter Hemington, one of the partners at BDO LLP, said the economic recovery is still faltering and declines in the manufacturing sector are alarming. Furthermore, the service sector is not showing any sign of being able to pick up the slack.

Although the overall picture seems to be one of doom and gloom, businesses in Scotland seem to be doing reasonably OK if the most recent Bank of Scotland Report on Jobs is anything to go by. Demand for both permanent and temporary workers north of the border increased strongly in July.

Bank of Scotland chief economist, Donald MacRae, said the number of permanent placements had been increasing continually over the past ten months, and last month the rate of vacancy growth rose to a three-month high.

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London and the South East of England top the late payments league, according to the latest study from Bacs.

Nearly 400,000 UK enterprises suffer because of delayed payments and the average owed to one company at any one time is £27,000. Although more firms in the south of England are owed money, they do not have as much debt outstanding as companies in the Midlands who are owed up to £38,000.

Large corporations are responsible for the lion’s share of the debt. They owe £24 billion to British SMEs and in some cases invoice settlement is up to 52 days overdue. The public sector and not-for-profit organisations on the other hand improved their payment times in the last half of 2010.

33% of SMEs say big companies are behind overdue bill payments and those operating in the manufacturing sector are the most likely victims. 53% of UK SMEs have suffered late payment, up 8 percentage points from June last year. When they do eventually receive settlement it’s an average 39 days over the agreed payment terms and this rise rises to nearly 50 days overdue in the distribution sector.

The burden of chasing overdue bills is having an adverse impact on smaller businesses. They now need to devote half a day every week to chase payment, equating to over 158 million man hours the British economy loses just to pursuing overdue debts.

At the same time, the number of firms using Invoice Financing to help improve cashflow rose by 16% in the year ending April 2011, according to the Royal Bank of Scotland.

Mike Hutchinson, Bacs’ head of marketing, urges more SMEs to use automated payments if possible so they can better manage funds which are under their control.

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Figures released last Wednesday showed a 0.5% increase in GDP in the first quarter of 2011. This balanced out the drop of 0.5% in the final quarter of last year, which was blamed on the abnormal weather we saw in December.

However, as labour leader Ed Miliband was quick to point out in the House of Commons, this means that GDP is now at the level it was in the quarter 3 last year.

Some sectors fared a lot better than others in Q1. Manufacturing output contributed the most to growth with an increase of 1.1%, whilst construction output dropped by 4.7%, mainly due to the large drop in public sector projects such as schools and hospitals. Total services output increased in the quarter, as did distribution, hotels and restaurants and transport, storage and communication.

Contractors may be concerned to hear the views of Michael Baxter, the editor of InvestmentandBusinessNews.co.uk, who believes that the UK’s economic recovery has reached a temporary peak.

He said Q1’s rise cancelled out the deficit from the previous quarter to put us back where we started from. He had been expecting a slightly better set of figures for the first quarter of this year because the Purchasing Managers Index looked more promising.

He went on to say that this was as good as it’s going to get for a while, but on the bright side, we are extremely unlikely to see another contraction, or a recession, later this year or at the start of 2012.

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Within 5 years, unemployment levels will reach 10% in over half the regions in the UK predicts the CEBR.

The biggest drop in economic output will be in the North West, but other areas such as the North East, Yorkshire, Wales and the West Midlands will also fare badly.

A director for a Manchester based IT recruitment firm noted that there has been an upturn over the last 6 months but uncertainty remains as to the effect of the public sector spending cuts.

Paul Clutton, a director at Professional Recruitment Wales has an even more pessimistic view of the future saying he believes that Welsh unemployment will exceed 10% as the public sector accounts for between 60 to 70% of all recruitment activity.

On a slightly better note, the UK saw a 1.2% increase in GDP over the last quarter. The ONS originally reported a figure of 1.1% in July but this has since been revised. The increase is the fastest quarterly rise recorded for over nine years. The manufacturing and production sectors recorded stability in the last quarter with production output rising by 1% for the second consecutive three months and manufacturing rising by 1.4% in Q1 and 1.6% in Q2.

The September Economic Forecast from the BCC now predicts GDP growth of 1.7% for this year and 2.2% in 2011. However, the Chamber still expects unemployment to increase, peaking at 2.65 million in 2012.

On a more positive note, at least as far as the economy is concerned, the BCC expects the fiscal deficit to reduce faster than originally planned but with a sharp slowdown in growth as the VAT increase is implemented. The business group expects GDP to average less than 2% per annum for the next four to five years.

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The chief executive of Hays, Alistair Cox, has some worrying news for those in the public sector who work through umbrella companies and are worried about the loss of their contract.

The government is widely expected to wield the axe on up to 750,000 public sector workers in the next 5 years but the private sector is highly unlikely to be able to create enough new jobs to absorb them.

One measure outlined by Mr. Cox to encourage private sector growth would be for the government to abolish employers’ National Insurance contributions. This would enable companies to take on more staff. The coalition has already gone some way towards easing the NI burden for small businesses start-ups outside the south-east by granting a 12 month NI holiday on their first 10 employees.

The Treasury currently raises around £55bn from employers NI contributions and its abolition would leave a gaping hole in the government coffers.

As if that news isn’t depressing enough, the CEBR has more doom and gloom for people in the north of England. The Centre has predicted that 10% of northerners will be unemployed in the next five years. Economic output in the North-west, north-east, Yorkshire and the Humber and the West Midlands will fall whilst London and the South will get a larger share.

Manufacturing centres such as the West Midlands are already suffering more than other areas. Although the situation has improved strongly in recent months, it is still well below pre-recession levels.

The recruitment market has been showing signs of improvement but a large proportion of that is due to employees changing jobs rather than an influx of new jobs being created.

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The Investment Management Association has said that the government must not be detracted from the need to reform the UK taxation system just because spending cuts are being implemented.

The IMA, which speaks on behalf of the UK’s £3 trillion fund management sector, called for the tax system to be changed in order to encourage more business investment for limited companies.

Some members and contractors are also calling for the government to introduce tax-free zones for equity investors in a bid to move away from an economy that relies solely on debt finance.

The IMA chairman, Dougie Ferrans, suggested that MPs might start overlooking tax reform if they focus too much on austerity measures. He said that as well as spending cuts the country also needs to come up with a long-term viable savings and investment regime.

He added that there needs to be a change in culture and incentives for investors if our manufacturing economy is going to be rebuilt on a meaningful scale. It will also be important to rebalance the economy by building up other sectors but Ferrans is concerned that the financial services sector will be diminished following the credit crisis.

He said that asset management is becoming increasingly global and London can no longer assume it has the right to monopolise that business. He went on to say that there needed to be a convincing case for asset managers to be UK based. Asia is our biggest threat. Companies will try and raise finance in markets where there is less regulatory complexity, he added.

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Engineers, IT freelancers and other technical professionals who are struggling to find work in the UK may want to consider working in the Asia Pacific region.

Companies such as Intel are continuing to expand in APAC where they are investing in both new and existing factories. Intel currently has more than 450 engineering vacancies across its Asian facilities.

Another IT company, Altera, the FPGA and ASIC specialist, is headquartered in San Jose and yet it employs more people in Malaysia than it does at HQ.

Microsoft has been a significant employer in APAC for many years. As well as four major facilities in India, the software giant also has a lot of research operations in China and India.

IT and software development are amongst the fastest growing when it comes to job opportunities. Microsoft has developed its own IT Academy to provide IT resources and training to schools, but some people believe that qualifications alone aren’t enough. A professor from Northwestern Michigan University said he thought that employers want to see industry certifications as well as degrees.

India and China are still the leaders in offshore IT outsourcing in APAC but countries such as the Philippines, Malaysia and Vietnam are starting to invest heavily in the sector and could become credible alternatives for limited company contractors.

A report by Gartner, a leading IT research and advisory group, says that although India is still growing when it comes to exporting IT services, it has seen a decrease in its share of the worldwide market. India is by no means giving up, though. Wipro, a leading service provider has taken on 2,500 engineering graduates already this year and another 1300 under its Academy of Software Excellence program.

And India’s Department of Information Technology is thinking about creating a unit to attract multi-billion dollar investments in manufacturing IT hardware, an industry valued at $43 billion. The department hopes it can increase this to $155 billion over the next few decades.

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The Scottish economy continued to improve in July, but this improvement did nothing to boost employment levels.

After five consecutive months of job creation, businesses north of the border reported that recruitment levels remained the same last month, compared with a slight increase across the UK as a whole.

Private sector companies continued to see an increase in new business albeit at a slower pace than in the previous 5 months.

The chief economist at the Bank of Scotland, Donald MacRae, said that this was the thirteenth consecutive increase in business activity. Manufacturing still led the recovery whilst growth in the service sector was moderate. There was an increase in new orders for the sixth consecutive month; however last month’s rise was weaker than in previous months.

The business and financial service sectors have shown welcome growth and tourism and travel continue to grow but at a slightly lower rate. MacRae concludes that the overall economic recovery news is positive, albeit slightly subdued.

However, there are fresh fears that Scotland may be about to suffer a surge in corporate failures. Figures from the Accountant in Bankruptcy showed that liquidations in Scotland rose by 103% in the 2nd quarter.

This was a rise of 8% over Q1. 572 companies in Scotland have gone into liquidation in the first six months, up by 265 on the first half of 2009.

Bryan Jackson from PKF business advisers and accountants warns that public sector spending cuts could lead to more corporate failures.

The largest rate of failures in Q2 were in the property and business activities sector, followed by the construction industry.

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The Voice of Small Business Index shows that confidence amongst SMEs deteriorated in the 2nd quarter of 2010.

Only 4% of respondents to the FSB’s survey believe that the third quarter of this year will see business prospects improve. That’s quite a big drop from March’s figure of 16%.

The FSB surveyed 1,200 of its members and discovered that 67% of SMEs are operating below capacity. The south east has the highest number of firms working below capacity and businesses in the service sector are more likely to operate below capacity than those engaged in manufacturing.

John Walker, National Chairman of the FSB, said that small businesses do not feel the economic recovery is secure yet and they think the future could see business growth hampered further.

The Federation is calling on the government to support SMEs to enable them to grow. Walker wants the National Insurance holiday for new companies to be applicable throughout Britain rather than just in specific regions. The south east for example is excluded from the NI holiday scheme and yet 64% of the firms in the region are operating below capacity.

600,000 people are likely to lose their public sector jobs over the coming couple of years and the government should be encouraging private sector companies to grow and create more jobs to rebalance the economy.

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