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Manufacturing optimism hits 20-month high

Brexit and the Trump effect do not seem to have dented UK business optimism, as manufacturing confidence has reached a 20-month high, according to new research.

The Business Trends Report by accountants and business advisers BDO shows overall optimism continues to rise. Its Optimism Index, which indicates how firms expect their order books to develop in the coming six months, climbed to 103.7 in January from 102.2 in December, above its long-term trend.

The sub-indices for both manufacturing and services were also higher, challenging claims that the UK has a two-speed economy, the firm said. Manufacturing optimism rose to 102.2 from 99.4, passing the 100 mark indicating growth for the first time since June 2015. The services sub-index increased from 102.7 to 103.9, a 14-month high.

The Output Index, which indicates how businesses expect their order books to develop in the next three months, increased for the third consecutive month, rising slightly from 97.4 to 97.5. This is another demonstration of the resilience of the UK economy since the EU referendum decision, BDO said.

It attributed the UK's positive performance to an overall improvement in the global economy, the falling value of the pound and better performance in key export markets.

However, despite the immediate benefit of sterling's sharp fall in value and the optimistic mood of UK businesses, the devaluation represents a double-edged sword as it continues to contribute to rising inflation, the firm cautioned.

The Inflation Index increased to 104.5 from 103.8 - and the upward trend is set to continue. While currency depreciation makes British exports more price competitive, firms' input prices have risen sharply, squeezing margins.

Peter Hemington, partner at BDO, said: "The UK economy seems to be remarkably resilient. British businesses are surprisingly confident about the short term, encouraged by the opportunities our cheaper currency and a better-performing global economy have created. These have provided a much-needed short-term boost for our economy, particularly our manufacturers.

"However, government still has much to do in these uncertain times if the UK is going to stay on the right economic track.

"The modern industrial strategy could be a step in the right direction. More importantly, simplifying regulation and taxes, and improving our education and training systems are high priorities for businesses in the new economy. And with government borrowing costs still close to all-time lows, the opportunity to replace our worn out infrastructure is still an enticing one."

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