Britain’s current economic situation is like climbing a steep a mountain path – it’s narrowing, and on one side there is a precipice, but on the other side is a gentle escarpment and we don’t know to which side we might fall.

That’s the view of Graeme Leach, chief economist and director of policy at the Institute of Directors.

He says: “Business shouldn’t be as worried as the media would have us believe, but we can’t be as confident as we would like to be.”

In a podcast on www.iod.com, the Reading-based economic guru says: “Things are getting decidedly hairy out there.”

He says we would need to be most concerned if employment figures fall rapidly, if consumers become more cautious and if interest rate cuts fail to have an impact on the economy, but, compared to circumstances before the last recession in the early 1990s, we can be reasurred that the inflationary threat is by no means as severe, the corporate sector is in much better shape and, this time around, we are not constrained by the ERM.

Nevertheless, the IoD’s latest quarterly Business Opinion has revealed that there is a sharp fall in business optimism and an increase in inflationary pressure. 

Figures just released show that more company directors are worried about their company’s prospects and investment intentions have also weakened.

Leach adds: “The sharp fall in overall business optimism is very worrying and points towards a hard landing.

“Thankfully, other results in the survey suggest we can still achieve a soft landing over the 2008-09 period.

“The survey suggests that thus far the pressure on the corporate sector for a labour shake-out is muted. Whether this situation will hold is the key uncertainty.”

He points out that the survey of business leaders was not all doom and gloom:

- The balance of those companies stating that they are performing well, versus badly, slipped to +74 per cent from +77 per cent previously. The performance balance remains high.

- A majority of firms still expect to increase employment in 2008 (a balance of +35 per cent compared with +36 per cent in the previous survey).

- A majority of firms still expect to increase investment as well (a balance of +23 per cent compared with +32 per cent in previous survey).

- 42 per cent of directors say their company’s sales performance has improved over the past two to three months whereas 20 per cent say it has deteriorated.

- Remarkably, 45 per cent of directors say the US downturn and the financial crisis has had no impact on confidence in their business.

- The balance of those directors expecting the trend in profits to be up versus down, declined to +17 per cent in the latest survey, but remains positive.

A balance of +33 per cent of directors expected their company’s net profits to be higher in 2008 than in 2007.

- Capacity utilisation slipped to -22 per cent from -11 per cent previously, but this is still above the levels seen in 2003-04.