IoD reveals bosses losing faith in UK plc

Britian's company bosses are more pessimistic about the outlook for their businesses than at any time for more than a decade, according to a survey released today by the Institute of Directors.

In a fresh signal that UK plc is sliding towards recession, the IoD's quarterly health-check of its members shows that confidence has slipped to its lowest level since the survey began in 1996.

IoD chief economist Graeme Leach said reports of current trading remained relatively healthy, but that directors were increasingly fearful about the future.

'The sharp fall in overall business optimism is very worrying and points towards a recession,' he said.

Directors' growing alarm chimes with a bleak forecast from the Ernst & Young Item club, which warns today that the UK is 'flirting with recession' and that overstretched shoppers will soon move 'from a state of denial to a state of despair', as weak wage growth and rising prices take their toll on household budgets.

Peter Spencer, the author of Item's quarterly report, predicts that the Bank of England will be forced to cut interest rates by the end of the year to limit fallout from the housing crisis, as unemployment leaps by 400,000. 'It is going to get a great deal worse before it gets better,' he said. Item has pencilled in sickly GDP growth of just 1.5 per cent for this year, and an even weaker 1 per cent in 2009.

The renewed warnings about the health of the economy came after official figures showed the Treasury ran up a deficit of £24bn in the first three months of the financial year - the biggest since records began in 1946.

Alistair Darling is considering relaxing Gordon Brown's cherished fiscal rules, as the credit crunch ravages the public finances. That would prevent him from being forced to make damaging tax increases in the midst of the downturn to balance the books; but City analysts say it could also put further downward pressure on the value of the pound.

'From a purely economic perspective, it shouldn't matter but it's a credibility issue,' said David Bloom, chief currency strategist at HSBC. 'It's the whole framework that's come under question: we're worried about the whole fiscal position.' He expects sterling to slip to $1.85 against the dollar by the end of the year, from its current level of just under $2, as confidence in the government's economic management wanes.