Directors' confidence dips in third quarter

Confidence among the directors of Britain's companies fell sharply in the third quarter of the year, as fears over the effects of the credit crunch began to spread, according to the latest business optimism survey from the Institute of Directors.

The proportion of directors who were more optimistic about their companies' prospects than three months ago plummeted by 20 percentage points, from 24 to just 4 per cent during the three months to October – even bigger than the drop in confidence seen after the 11 September terrorist attacks. Directors' confidence in the outlook for investment fell even further, from +17 to -3 per cent over the period.

"This is a pretty gloomy survey with the decline in business confidence worrying," said Graeme Leach, chief economist at the IoD. "Thankfully, actual business performance remains high. Across the whole economy there is a real divide between the actual impact of the financial crisis to date and expectations of what it might bring in the future.

"The key question now is whether optimism will bounce back, because if it doesn't, business investment could be hammered."

Fifteen per cent of directors surveyed by the IoD said they believed the financial crisis had already resulted in a slowdown in sales for their company. However, only 6 per cent said they had seen a rise in the cost of borrowing as a result of the crunch.

Meanwhile, Lloyds TSB reported similar results in its own monthly business confidence survey, claiming confidence fell inOctober for the first time since June.

The Lloyds report said that while the balance of confidence had fallen across industrial and service firms during the month, it had in fact increased among distribution businesses.

"A strong pound, slower eurozone growth and higher energy costs are all factors weighing heavily on business confidence this month, particularly among manufacturers," said Trevor Williams, chief economist at Lloyds TSB Corporate Markets. "Firms with high gearing, weak cash flows and those dependent on earnings from sectors built on consumers' discretionary spending will experience the most anxiety.

"These results indicate that UK economic growth is likely to slow in the final three months of 2007. However, although these signs of weaker business confidence are a concern, the Monetary Policy Committee is not likely to make any knee-jerk rate cuts unless there is actual evidence of slower growth over a sustained period. Therefore, a rate cut is unlikely before February 2008."

Last week, the Bankof England's MPC decided to hold rates at 5.75 percent for the fourth month in a row.

In the US, the Federal Reserve cut rates for the second time in as many months at the start of November.