Business confidence dives on inflation fears

By DIANE COYLE

Economics Correspondent

Business confidence has slumped because of fears of higher inflation and the risk of higher interest rates. According to the latest bi-monthly survey by the Institute of Directors, optimism has fallen to the lowest level for almost four years, excluding a brief dip after Britain was bumped out of the exchange rate mechanism.

The proportion of directors saying they felt more optimistic about the economy fell 10 points to 28 per cent in February from December . ``This marks an important change in directors' perceptions of the threats facing their companies,'' said Tim Melville-Ross, director general of the IoD.

He said there was a clear indication that companies were hurt by rising costs. The bulk of the IoDs members run private, small to medium-sized companies. Those who said they had become less optimistic about the economy cited three factors: inflation and interest rate fears, slower economic growth and the political situation.

Despite these new concerns about the economy, 53 per cent of the directors surveyed said they were more optimistic about their own companies' prospects. This was the same proportion as in December, and the balance of optimists over pessimists increased slightly.

The balance of firms saying orders were higher increased, as did the proportion reporting higher output and profits. The main reasons given for greater optimism were the introduction of better products and the level of new orders. Pessimists blamed lower new orders along with concerns about the economy and consumer confidence.

The spread of pay awards reported had widened, and ranged from 2-5 per cent. Just over half of the settlements were either the same as or lower than last year. There was a small rise in the proportion expecting the number of jobs in their firm to increase in the next six months.

The IoD found an increasing proportion of companies planning to step up investment in the next six months - 44 per cent in February compared to 38 per cent in December. Mr Melville-Ross said directors were increasingly convinced that the government would not acommodate inflationary pressure. This meant a lower required rate of return from investment.

However, a quarterly review published yesterday by Trade Indemnity, the debt management group, said there was no evidence of higher investment even though many manufacturing firms had been working close to capacity for a year.

``Larger firms are trawling downmarket for more profitable work, nudging out medium sized players,'' it said.