Business shaken by Tory fight, says IoD

DIANE COYLE

Economics Correspondent

The damage to business confidence caused by the uproar within the Conservative Party is "unlikely to be slight", the Institute of Directors warned yesterday. Tim Melville-Ross, director general of the right-wing employers' organisation, said that business would now expect the result of the leadership contest to herald a return to political stability.

Political uncertainty had damaged business confidence even before John Major announced the Conservative Party leadership contest, according to the IoD's latest survey of members.

The survey, conducted two days before Mr Major's announcement, shows that last month the balance of those more optimistic over those more pessimistic about the outlook for the economy dropped to zero - the lowest since the ERM debacle in September 1992. "Uncertainty will undoubtedly have increased considerably in the interim," Mr Melville-Ross said.

Those businessmen and women who were still optimistic about the economy cited evidence of growth as the reason. The pessimists blamed both the political situation and the slower pace of growth. The balance feeling optimistic about their own company's prospects fell to 38 per cent from 48 per cent in the April survey. Respondents feeling cheerful about their own company said the main reason was a development within the firm, such as new or better quality products. Among the less optimistic the main reason was the level of sales or orders.

Even though four out of five directors said their company was doing very or fairly well, job prospects were bleaker.

The proportion of respondents expecting to add jobs in the next six months fell to 39 per cent, from 48 per cent in April. There was a small drop in investment plans for the next six months. Pay settlements remained modest, with more than a third of firms making awards of 2-3 per cent and another quarter awarding 3-4 per cent rises. But nearly half of all pay awards this year have been higher than last and only 13 per cent lower.

The IoD said the survey, which covers mainly small businesses, confirmed that the economy was slowing down. However, it issued a warning about the danger of inflation, saying the renewed pressure on sterling since the announcement of the leadership election could add further to inflationary pressure.

Mr Melville-Ross said: "We see no need for a rise in interest rates on economic grounds at the moment, although the continuing weakness of sterling is a cause for concern and any further significant depreciation would add to inflationary pressures in manufacturing."