Erosion in UK Business Confidence

The CBI has renewed pressure for a half-point cut in interest rates after publishing a survey showing the US terrorist attacks further eroding UK business confidence. The survey of almost 250 top executives, carried out by MORI, paints the most comprehensive picture yet of the impact that September 11 had on British firms and will have in future.

Almost two thirds (63%) of respondents said the attacks had damaged business prospects. Of these just over half (52%) said prospects were slightly worse while 11% said much worse, indicating that the overall impact was serious without being disastrous.

A third of companies expect a serious impact on demand. Twenty nine per cent said they had already seen a significant number of orders cancelled and almost four out of ten expect this to continue over the next 12 months.

Firms close to the domestic consumer expect to fare better than those that are more affected by international trading conditions. Construction firms and manufacturers of industrial goods are more pessimistic than retailers and manufacturers of consumer goods.

Most respondents have reacted rapidly to events with over a quarter cutting investment and around 10% reviewing security measures, cutting overheads, changing travel policy or reducing staff.

Companies said the impact on costs was mixed. Some said insurance and distribution costs had already increased and 90% expect insurance to become more expensive over the next year. On the other hand, 29% expect the cost of capital to fall.

More encouragingly, companies expect the impact to be reasonably short-lived. Almost half do not expect the consequences to go on for more than a year and only 10% anticipate the impact to last for more than two years.

But over a third of companies predict a decline in profit margins during this financial year and almost as many next year. Of these, the average squeeze will be around 13% this year and some 20% next year.

According to Digby Jones, CBI Director-General, "September 11 was a body blow to business, which will lengthen and deepen the global slowdown. Firms are bracing themselves for a rough ride, but our economy is resilient and we do not expect an overall UK recession. The situation is highly uncertain and much will depend on policy makers. We need another cut in interest rates and a prudent plan for the Budget. This is a real test of whether we can avoid the boom and bust of the past."

The CBI warned the Chancellor that there is no room to raise business taxes when he publishes his Pre-Budget Report later this month. But it wants tax credits for training and research and development, which could cost up to £2 billion.

The organisation has also urged Mr Brown to prepare a contingency package of emergency tax measures for the hardest hit sectors in case the economic slowdown significantly worsens. This should be ready for the March Budget.

The employers' organisation made clear that there is no room for new spending initiatives. But it added that the government should stick with current spending plans in order to strengthen the economic infrastructure, especially in transport and education.

The CBI/MORI survey covered firms employing about a million people, with sizes ranging from less than 100 staff to more than 50,000. Nearly half were service sector firms and a quarter were from the manufacturing sector, with the remainder in utilities, technology, new media and mining. Interviews were conducted by MORI MTS by telephone between 12 and 23 October 2001

All articles 2006-22 written and edited by Mel Crowther and/or Nick Thomas unless otherwise stated.

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