Business confidence slips as the pound's strength puts squeeze on profit margins

Confidence among private companies slipped during the summer, according to a new survey of private companies. Three-quarters of those surveyed also said the burden of Government regulation had increased over the past year.

Confidence among private companies slipped during the summer, according to a new survey of private companies. Three-quarters of those surveyed also said the burden of Government regulation had increased over the past year.

However, a shortage of skilled employees remained the single most important problem facing businesses now. Almost one in four companies said this was a key issue, up from one in five three months ago.

The quarterly business barometer from 3i, gauging the climate for 1,000 companies in which it has invested, found that the north-south gap narrowed during the three months to August, although businesses in the south remained more upbeat.

Brian Larcombe, 3i's chief executive, said: "The fall in overall confidence levels is indicative of the tough conditions faced by a number of businesses, particularly those in the more traditional sectors."

A separate report published today says eight out of ten manufacturers have accepted a profits squeeze in order to protect export markets from the impact of the strong pound.

A survey of 121 manufacturers by the Centre for Economics and Business Research found that 75 per cent had cut costs, mainly by sourcing their inputs from suppliers in the euro-area but nearly as many had also cut prices.

As a result, 79 per cent said their profitability was lower. Manufacturers also believe they have lost nearly 11 per cent of the market share.

Respondents said they believed UK prices would have to converge with those in the eurozone whether or not Britain joins the single currency. Just over a quarter thought joining the euro was the best solution, slightly more than those favouring a cut in interest rates.

Doug McWilliams, head of the CEBR, said:"No-one should be surprised that UK manufacturers have taken a hit on market share and profitability as a result of the strength of sterling."

The findings were confirmed by Experian, which monitors the financial health of 2,000 UK companies. It said average return on capital, a key profitability indicator, has fallen for four quarters in a row, to stand at 12.61 per cent in the 12 months to March, down from a peak of 14.18 per cent in March 1999.

Although the UK economy was still growing, there was a divergence in how the manufacturing and service sectors were doing, said Peter Brooker, the report's author. Manufacturing growth had "slowed to a trickle" while the service sector was expanding at around 3 per cent a year. Even some service sectors were reporting problems, Experian found.