The economy is in the eye of the storm and, though things seem to be better, they are actually getting worse, according to a major survey of business health.

The warning comes from Begbies Traynor, the business rescue, recovery and restructuring specialist, which has thrown its weight behind those experts predicting a 'W-shaped' recession.

The assessment follows the release of the firm's Red Flag Alert, a monitor of early warning signs of company distress.

The year on year statistics for the West Midlands show the number of companies with either a court action and/or average, poor, very poor, insolvent or out date accounts down 17 per cent to 11,292. There was a fall of five per cent for those experiencing critical problems - county court judgments totaling £5,000 or more and/or wind-up petition related actions - to 376.

Almost 134,000 companies across the UK have shown signs of pain in the third quarter.

The good news is that the number with significant and critical financial problems has fallen in absolute terms both year on year and quarter on quarter.

This is put down to the impact of HM Revenue & Customs' Business Payment Support Service, which has seen more than 215,000 companies defer payment of £3.79 billion in tax liabilities; increasing credit availability; growing business confidence; and the holiday season slowing enforcement activity by creditors while easing cash flow pressures.

But the Begbies Traynor report cautions: "Evidence is mounting that we are maybe at the mid-point of a 'W' shaped recession, with a deluge of business failures likely in 2010. Similarities can be drawn with the recession of the early 1980s which also saw a temporary rise in business confidence in 1981 before rapidly deteriorating in 1982.

"Statistics from recessions over the past 40 years confirm that insolvencies peak between one and two years after GDP stops shrinking. Scarce credit after this recession may intensify this effect, causing a substantial rise in insolvencies during 2010 and into 2011."

Ric Traynor, Executive Chairman of Begbies Traynor Group, said: "The UK may be in the eye of the storm. Well-intentioned government efforts to prop up struggling companies may provide a necessary lifeline in the short-term, but will ultimately prove futile in many cases. Both banks and trade creditors are also holding off wherever possible in the hope that business fortunes may improve, but Begbies Traynor supports the view of many leading economists that the UK is currently at the midpoint of a 'W' shaped recession.

"Despite the recent UK stock market rally, private equity groups remain on the sidelines, with recently reported UK deals in the third quarter being at their lowest level for 25 years, a clear indication that they believe that the worst is not yet behind us. There is every reason to suggest that the unemployment and insolvency peaks of this recession remain some way off."

John Kelly, regional managing partner at the firm's Birmingham office, said they were seeing no reduction in instructions and the statistics were hiding the likelihood that things would deteriorate further.

"HMRC are now taking a less sympathetic attitude and the increasing unemployment figures will hit retail and other sectors reliant on discretionary spend," he said.

Nationally, engineering and recruitment are suffering the most, with critical actions up 31 per cent and 12 per cent respectively on last year. 

The report noted: "Engineering companies form a large part of supply chains to major manufacturing operations and industrial projects, so they are most vulnerable in the current climate. The recruitment sector is a victim of rising unemployment, which typically continues and peaks well after the end of GDP shrinkage."

Improving sectors in quarter three were manufacturing, with critical problems down 18 per cent; automotive, down 16 per cent; property services, down 12 per cent; construction, down six per cent; and retail, down four per cent.