Inflation and credit crunch prompts pessimism over growth prospects

David Prosser
Monday 19 May 2008 00:00

British businesses' confidence in the state of the economy plunged during April, according to a survey from Lloyds TSB, with 70 per cent of companies pessimistic about prospects for economic growth.

Lloyds said confidence had been hit by rising oil prices, the fact that high inflation has reduced the chances of interest rate cuts this year, and the credit crunch. The picture painted by the survey is the gloomiest since the bank began researching business confidence in 2002.

Trevor Williams, Lloyds TSB's chief economist, said: "For some time, the threat of a downturn has been looming, and now firms are becoming even more concerned as fuel prices rise further. With inflation on the rise, it's highly unlikely that the Bank of England will be cutting interest rates any time soon, and that may be weighing heavily on some businesses."

However, the survey also reveals that not all sectors are so downbeat about their prospects, with companies in the industrial and distribution areas of the economy reporting that their confidence has risen over the past month. Mr Williams said these companies' optimism was likely to reflect an improving outlook for exports, with sterling continuing to weaken against the dollar and the euro.

The relatively upbeat sentiment in some areas of the economy also reflects some economists' arguments that the slowdown in the UK has so far been confined to certain industries, particularly financial services, as well as to areas of the country with high exposure to these sectors, such as London.

Richard Lambert, director-general of the CBI, has repeatedly insisted that businesses outside the capital are performing much better than the most pessimistic economic commentators have suggested.

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