Survey points to return of negative growth

Britain's faltering economy could see a return to negative growth as early as the first quarter of 2011, a leading accountant warns as it reports that growth is continuing to ease back.

BDO Stoy Hayward, in a report issued today, warns that economic growth, which slowed markedly during the third quarter of the year, is likely to fall back again in both the first and second quarters of next year.

Although BDO says it is possible to detect some signs of improving optimism among British businesses, there is still a chance of a "double dip" recession, which would mean economic growth going negative for two successive quarters.

The BDO forecasts are based on its optimism and output indices, which attempt to track the perceptions of businesses about how well they expect to trade in the months ahead.

The Optimism Index, which BDO uses as a measure of how well companies expect to be trading in six months' time, remained stuck well below 95 in October, a level consistent with a period of economic decline. Its Output Index, which is a forecast of companies' trading prospects over the next three months, fell to 93.8 last month, from 95.9 previously, which suggests a negative figure for the first three months of next year – with the contraction beginning as soon as December.

BDO says the only silver lining in the data is that the optimism index rose very slightly last month, from 91.6 in September to 91.9 in October. This marginal improvement suggests some companies may think better times could be ahead.

Even so, Peter Hemington, a partner at BDO, said there was plenty of reason to feel nervous about the UK economic outlook.

"The slight increase in the Optimism Index is, we hope, a sign that the rot may have stopped and businesses are starting to regain confidence after a dire five months," he said.

"We would, however, urge caution – although GDP data was above expectation for the second quarter and third quarter of 2010, this was buoyed by a short-term boost in the construction sector which is likely to weaken as the public sector spending cuts take their toll."

Mr Hemington said the Bank of England would come under further pressure to try to lift the UK out of recessionary territory.

"Although our research suggests that there could be a light at the end of the tunnel, prospects for growth are still gloomy in the immediate term," he said.