Decline in business confidence may dent recovery

23 August 2010

A fall in business confidence could apply the brakes to the economic recovery later in the year, a new survey has suggested.

The proportion of firms saying they are less confident about the future has risen to almost a fifth (19 per cent) in the third quarter of the year compared with the 14 per cent in the second quarter, according to the latest Business Confidence Monitor (BCM) from the Institute of Chartered Accountants in England and Wales (ICAEW).

Two major contributory factors in the decline in confidence have been the tax rises announced in the emergency Budget and the prospect of public spending cuts in the comprehensive spending review due in October, the ICAEW said.

Overall, greater caution among businesses saw the BCM slip from +25.5 in the second quarter of 2010 to +21.5 in the third, suggesting a possible slowdown in the rate of recovery.

Michael Izza, chief executive of the ICAEW, said: "UK businesses that came through the recession are now facing the challenge of surviving the recovery.

"They still don't know what the future holds and are uncertain about how the mood of fiscal austerity will impact the economic recovery.

"Government needs to deliver on its commitment to ensure Britain is open for business while taking the tough decisions required to tackle the deficit."

But despite the dent in confidence, there was a marked improvement in business finances, with both turnover and profit growth returning to positive territory for the first time since the beginning of 2009, at 1.6 per cent and 1.7 per cent respectively.

Capital investments are expected to grow by 2 per cent during the coming year, with research and development budgets also set to increase by 1.4 per cent. Although positive indicators, the ICAEW said both figures are still well below pre-recession levels.

Elsewhere in the survey, businesses reported their smallest annual fall in staff numbers since the beginning of 2009 and predicted that the number of people they employ would increase by 1.1 per cent during the coming 12 months.

Pay settlements, however, were forecast to be pegged at a moderate average of 1.5 per cent over the course of the next year.