Business confidence tumbles amid fears spending cuts will spark new slowdown

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The Independent Online

Business confidence is plummeting despite companies enjoying their strongest trading conditions for three years, a study shows.

According to the latest business trends survey to be published today by the accountant BDO Stoy Hayward, its Output Index – which tracks businesses' experience of current trading – shows a 0.6 point increase, from 101.0 in May to 101.6 in June. It is the first time the index, which is seen as a reliable indicator of short-term economic growth prospects, has remained above 100 for an entire quarter since 2007. But despite the encouraging data, the Optimism Index, which reflects how businesspeople expect trading to develop in future , suggests growth will weaken over the next two quarters, with the indicator dropping from an already low 97.0 to 96.9.

This correlates to annualised GDP growth of just 1 per cent for the final quarter of 2010. BDO says this reflects an expectation of gloomy economic times as public spending cuts start to impact on consumers during the second half of the year.

The Office for National Statistics is this week expected to report another rise in inflation above the Bank of England's target rate, to be followed by labour market statistics that economists fear will show unemployment rising on the internationally comparable measure.

These trends will likely strengthen anxiety among businesses already pessimistic about their economic prospects, who feel threatened by government plans for fiscal tightening to deal with the public-sector deficit. Peter Hemington, a partner at BDO, said: "The Comprehensive Spending Review in October will flesh out how the Government plans to put its proposed spending cuts into practice and there will be some big bumps on the road to recovery ahead.

"To mitigate this, the Government needs to tread carefully in the meantime, to reassure businesses it will focus on restoring growth where possible, while continuing its focus on cutting the budget deficit."