Economic confidence falters

24-08-2006

Business confidence in the UK economy wavered during May, with optimism especially hit by high-profile plant closures, according to new research.

The proportion of firms feeling optimistic about economic prospects fell by 19 points to 37 in May, a significant swing in confidence from plus 34 per cent to just four per cent, the monthly Lloyds TSB Financial Markets Business Barometer claims.

Economic confidence within the Midlands experienced the sharpest decline, largely attributable to the announcement regarding the closure of the Peugeot manufacturing plant in Coventry.

"The Peugeot closure seems to have bred wider concern about the durability of UK manufacturing production and filtered through to firms further down the supply chain," commented Trevor Williams, chief economist at Lloyds TSB Financial Markets.

The proportion of Midlands companies feeling upbeat about their business prospects fell 42 per cent points to minus 18, with almost half of firms in the region now feeling pessimistic about the financial outlook.

However, despite the number of insolvencies increasing across the UK, manufacturing output still rose during the first quarter of 2006, with business investments increasing by 1.5 per cent.

Furthermore, while overall economic confidence is markedly lower than previous months, the current level is still above the first two quarters of last year and more than half of companies rate their individual prospects as promising.

Mr Williams explained that the underlying reasons for weakening confidence in the economy could not simply be attributed to the increased number of companies going under.

"Rising insolvencies, particularly in the retail sector, may be driving the slight downturn in trading expectations but do not explain the gloomy economic outlook of UK firms," he said.

The economist predicts, however, that economic confidence in the UK will rebound over the coming months, citing the improved state of the exports market.

He explained that "last year the UK exported more cars than ever and although these plant closures are a big negative for economic prospects, manufacturing is no longer in recession for the first time in over a year".

"Export prospects are significantly brighter and investment spending is beginning to rise as domestic and overseas demand is seen as increasingly durable. Given this, we look for the survey to bounce back in June," Mr Williams added.



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