UK manufacturers are feeling the full brunt of oil price rises as order books wane and confidence dwindles, according to the latest Business Trends report from BDO Stoy Hayward.
But wider business confidence, particularly among service sector businesses, is stabilising, the report claims.
The ailing manufacturing sector has suffered another blow as the price of crude oil increases further following damage to US oil rigs caused by Hurricane Katrina. Service sector businesses, however, are benefiting from August's interest rate cut.
BDO Stoy Hayward predicts the Bank of England's Monetary Policy Committee will keep interest rates on hold this month. With inflation now above its two per cent target and oil prices remaining high, rates will remain at 4.5 per cent until early next year, it suggests.
The output index, which predicts GDP movements a quarter ahead, edged up from
99.5 in July to 100.1 in August. The index implies annualised economic growth of just 2.6 per cent in the fourth quarter of 2005, falling short of the Chancellor's target of between three and 3.5 per cent.
Service sector output increased from 99.5 to 101.2 last month. It is expected last month's interest rate cut will revive consumer spending on the high street and further encourage the booming internet retailing sector. In contrast, the manufacturing output index fell two points in August to 97.1 as oil prices hit orders.
The inflation index increased from 99.5 to 101.2 hinting at increased inflationary pressures in the coming months.
The longer term outlook, however, is more positive.
The optimism index, a leading indicator of GDP growth two quarters ahead, rose from 100.5 in July to 100.9 in August, implying economic growth of 2.9 per cent in the first quarter of 2006.
Manufacturer optimism rose 2.3 points to 100.3 during August.
Kim Rayment, partner at BDO Stoy Hayward's Birmingham office, said: "The spike in fuel prices is no doubt having a marked affect on the 'poll of polls' this month, with manufacturers hardest hit."