Executive confidence dips amid worries over strong pound: Latest survey highlights stop-start nature of recovery - 'Seven wise men' set to warn Chancellor of threat to exports

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The Independent Online
BUSINESS confidence has fallen for the first time since Britain crashed out of the European exchange rate mechanism last September, providing further evidence that economic recovery is likely to prove patchy.

The Institute of Directors reports today that the proportion of senior executives more confident about the economy than they were six months ago has fallen from 65 to 55 per cent since April. Economic confidence had previously been improving steadily since last October.

'These results provide further evidence that the recovery will be slow and corrugated, with periodic ups and downs,' said Peter Morgan, IoD director-general. The fall in confidence is reflected by flat order books and small falls in profits and volume.

The fall in confidence has been most dramatic in manufacturing industry, perhaps reflecting the loss in international competitiveness brought about by the recent strength of the pound. Executives may also fear that consumers will tighten their belts again following tax increases.

But executives are slightly more confident about their companies' prospects than they were in April. Executives increasingly see cashflow as their main problem, suggesting many intend to expand their companies and are worried about finance.

The fall in business optimism follows a sharp drop in consumer confidence in June, both of which suggest recovery has slowed since the beginning of the year. The 'seven wise men' appointed to give the Chancellor independent economic advice are expected to warn today that a continued rise in the pound could seriously impede recovery by hitting exports.

The Chancellor received better news from Infolink, the credit information group, which reported that demand for credit was pulling further ahead of last year's levels. But Infolink warns that this rise in credit enquiries will have to be matched by the amount of credit advanced if recovery is to strengthen.

The Finance and Leasing Association also reports consumer credit well up on a year ago, with a 29 per cent rise to pounds 1.02bn in the year to May. But this is 1 per cent down on April, with motor finance also showing a fall since the previous month. Fears of a serious fall-back in consumer spending should be eased by figures today showing that annual growth in the narrow money supply measure M0 - largely cash in circulation - has risen back above the 4 per cent ceiling of its 'monitoring range'.

Recent falls in unemployment may have increased consumers' willingness to borrow by making them feel more secure in their jobs. But the Royal Institution of Chartered Surveyors forecasts that 114,000 jobs will be lost in construction this year and next, before an upturn in 1995.

Cambridge Econometrics also argues that unemployment will resume its rise this year, but will fall or remain steady in all regions in 1994. It warns that job loses in manufacturing and services in London, the South- east and the West Midlands will hold back recovery this year.

Peter Warburton, economist at Flemings Research and a member of the 'Liverpool Six', warned over the weekend that 'economic recovery will be erratic and unusually slow, despite the marked relaxation of government policy between September and January'.

He said the buoyancy of consumer spending on cars, household goods and leisure items in the first quarter showed 'the hallmarks of a temporary spending binge'.

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