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Businesses worry over domestic demand

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Businesses are expecting a downturn in activity for the first two quarters of 2011, according to a new survey.

The poll, conducted by Lloyds TSB, found that business confidence has been hit by an anticipated slowdown in UK sales.

The Lloyds ‘Business in Britain’ bi-annual survey recorded the first fall in business confidence in 18 months amidst fears that consumers will be spending less in the first part of 2011.

The confidence index dropped to a plus balance of 12 per cent, down from the 18 per cent registered in the last survey.

Over half (57 per cent) of those firms questioned said that they expected domestic demand will fall away in the first six months of the year, partly as the result of the hike in VAT and uncertainty among consumers.

Only 20 per cent of firms intend to increase business investment, while a similar proportion (21 per cent) are looking to reduce expenditure.

Nearly a half (47 per cent) do not plan to change their level of investment.

The air of caution extended to employment policies. Over two-thirds (68 per cent) of respondents aim to hold workforce numbers at their present level.

John Maltby, managing director of Lloyds TSB Commercial, said: “Businesses are less upbeat than they have been about prospects for sales, orders and profits. Many businesses will be planning price increases to keep profits at current levels, but in general firms are evenly split on the chances for a profitable 2011.”

He added: “Worries about the economic outlook coupled with the fact that most firms aren’t operating at full capacity suggest that a cautious line on spending may seem the right approach.

“But there is a real danger that without continuing investment and innovation, competitiveness could be undermined – and the worries firms harbour about weaker growth could become a self-fulfilling prophecy.”

Trevor Williams, chief economist at Lloyds Bank Corporate Markets, commented: “Businesses have lost some of the confidence they had regained and are bracing themselves for a slowdown in trade. Exports are no ‘silver bullet’ for businesses seeking growth, but if firms can successfully harness demand outside the country, then there is hope that the economy can rebalance.”