Business confidence falls to two-year low

Business confidence dec-lined for the second consecutive quarter to a two-year low, in line with the gloomier outlook for the economy predicted by the Bank of England last week, according to the latest Business Confidence Monitor (BCM) from the Institute of Chartered Accountants in England and Wales (ICAEW).

The continuing credit squeeze, higher interest rates since August last year, and a slowing housing market have caused finance professionals to become pessimistic about business prospects for the coming 12 months. The downbeat mood extends across sectors, regions and business size, despite the fact that the economy is still growing at around 3 per cent a year.

Michael Izza, the chief executive of the ICAEW, said: "The current divergence between the Business Confidence Index and economic growth is likely reflecting a turning point for the economy. Although it is too early to judge the full impact of fin-ancial turbulence and tight-er credit conditions on the real economy, a slowdown in the UK is on the horizon. The events of the end of August and early September such as the run on Northern Rock has had a significant impact on business confidence. A probable recession in the US and a slowdown in the eurozone will only exacerbate the slowdown."

Accountants in the property and finance sectors, accounting jointly for about 20 per cent of economic output, were especially nervous, with confidence levels plummeting to their lowest points since the survey began. The ICAEW says that confidence in the fin-ance sector has "collapsed." The credit crunch has caused financial professionals to reduce capital investment growth further next year. Firms also expect to see a slowdown in turnover and profits growth in 2008. However, the decline could prove to be deeper than expected if energy and food prices continue to push headline inflation and industrial costs up.

The Institute said higher interest rates have caused confidence within the property sector to drop and noted that a weakening housing market will feed through to consumer spending via the "wealth effect", though the Bank of England disputes such a straightforward connection between house prices and consumer spending. However, as property accounts for 43 per cent of UK households' total net wealth compared with 28 per cent a decade ago, as banks have to write down billions of pounds of losses and as City bonuses will be lower next year, there should be some downward pressure on property, especially in the buy-to-let market.

Noting that the Bank of England has chosen to main-tain interest rates for some time, on relatively robust official data, the Institute warns that "the Bank of England may have lost its golden opportunity to make a pre-emptive cut to prevent a sharper economic slowdown".