Fears of weakening prospects for the new year have knocked business confidence in the West Midlands back to a two-and-a-half year low, according to the latest Business in Britain report from Lloyds TSB Commercial. Firms remain particularly worried about the outlook for demand in domestic markets and the eurozone, and are continuing to rein in recruitment and investment spending as a result. However, West Midlands businesses are still reasonably upbeat about prospects in export markets outside Europe, where trade has remained resilient in recent months.

The twice-yearly report, which canvasses the views of 177 firms in the West Midlands, Birmingham and Staffordshire, shows that business confidence has fallen to its lowest level since mid-2009, when the economy was starting to emerge from recession.

John Robson, regional director for Lloyds TSB Commercial in the Midlands and North, said: "Export markets outside Europe will be the key to growth for businesses, in what will undeniably be a tough start to the year.

"It is understandable that businesses are keeping the brakes on investment, given the volatile economic climate, but in order to break the cycle of dwindling confidence leading to slower growth, it is crucial that firms do whatever they can to maximise opportunities, at home or overseas."                                            

John Robson added: "Although export markets are certainly strained, there are still opportunities for growth in countries outside Europe for those West Midlands businesses in a position to seize them. For our part, we are doing all we can to help businesses shape up to make the most of openings in these markets."

The Business in Britain confidence index tracks West Midlands businesses' views of likely sales, orders and profits for the coming six months and presents the overall 'balance' of opinion, weighing up the percentage of firms that are positive in outlook against those that are negative. The overall confidence balance is the average of the individual balances, for sales (14 per cent), orders (18 per cent) and profits (-8 per cent) and has fallen to eight per cent in the region, from a balance of 15 per cent in July. This is in line with the national confidence balance of eight per cent.

Concerns over demand - in Europe and beyond

The issue weighing most heavily on the minds of businesses in the West Midlands is faltering domestic demand. Over two thirds (67 per cent) of firms say that they are more worried about weak markets at home than any other potential threat to their business - a rise from 56 per cent in the last survey. 

However, businesses in the region are also increasingly concerned about overseas demand. Over a third (34 per cent) expect to grow their total exports during the first half of the year, but 14 per cent are braced for a fall, resulting in a balance of 20 per cent expecting exports to rise. While still positive, this figure has slipped 21 per cent from the balance of 41 per cent recorded in the last survey.

The decline in export prospects reflects weaker European demand. Just over a quarter (26 per cent) of businesses expect exports to Europe to improve in the first half of the year, while 19 per cent anticipate weaker demand. The resulting balance of seven per cent, while still positive, is weaker than the balance of 32 per cent recorded in the last survey. In contrast, the balance for exports to the rest of the world was only marginally lower at 30 per cent, falling from 32 per cent in July.

Investment and employment - on hold

West Midlands firms' uncertainties about the economic outlook are continuing to affect their investment intentions. Nearly a fifth (18 per cent) say they plan to boost investment spending over the next six months, but 23 per cent plan to reduce it. The resulting negative balance of -5 per cent is two per cent lower than in the last survey. Almost half (47 per cent) of companies say they plan to keep investment spending levels unchanged in the first half of the year.

A similar picture emerges for recruitment plans. Fifteen per cent of West Midlands businesses say they intend to increase staff numbers during the first half of 2012, while 14 per cent are planning reductions. The result is a positive balance of one per cent, compared to July's positive balance of nine per cent. The majority of the region's businesses (68 per cent) expect to keep staffing levels as they are for the next six months.

Trevor Williams, chief economist, Lloyds Bank Corporate Markets, said: "The euro area sovereign debt crisis - and lack of a comprehensive solution - has exacerbated existing concerns about domestic economic weaknesses. As a result, they are holding back on crucial decisions regarding investment and recruitment.

"This latest survey suggests we could see a period of zero to slightly negative growth in the first six months of the year. The outlook further out will depend partly on whether sufficient progress can be made to resolve the euro crisis and whether businesses act to seize opportunities to invest and grow."