Rising rates fail to dent business optimism, IoD reports

The prospect of rising interest rates has failed to dent a mood of surging optimism in the corporate sector, according to the latest quarterly survey from the Institute of Directors. But the IoD's chief economist, Graeme Leach, believes consumers will have to cut back under the weight of dearer debt.

The IoD, which is strongly represented among small and medium-sized businesses, says in a report out today that the balance of companies performing well rather than badly has risen from 53 per cent to 62 per cent in the past three months. Optimism about their own outlook has spread from 35 per cent to 38 per cent.

On the investment front, 26 per cent of companies are optimistic, up from 18 per cent before and a disastrous minus 28 per cent a year ago when the Iraq war was looming.

Although the poll took place before last Thursday's 0.25 per cent rise in interest rates to 4 per cent, the IoD found that 90 per cent of companies had made no change to sales forecasts in light of the previous rate rise to 3.75 per cent. And higher interest rates had had no impact on 92 per cent of respondents' employment plans.

Mr Leach said: "We believe there can be a successful re-balancing of the UK economy this year, with faster business investment growth and slower growth in household spending. The survey shows that business investment is set to accelerate, albeit at a slower rate than previous upturns.

"On the consumer front, total debt servicing costs are actually very high and not, as assumed, very low. This suggests to the IoD that consumers will begin to listen to the shouts coming from the Bank of England. And let's not forget that the shouts will get louder."

The IoD expects interest rates to peak at 4.5 per cent by the end of this year, and could go higher if consumers do not toe the line. Mr Leach said: "If household consumption continues to rise as a proportion of Gross Domestic Product, as the same time that business investment accelerates, interest rates may need to rise further than predicted. If house price growth and equity release remain very strong, the risk of a subsequent house price crash will become much more likely."