THE credit crisis has led to a sharper fall in business confidence than in the wake of the September 11, 2001 attacks on America, according to the Institute of Directors.

Its quarterly business opinion survey, to be published tomorrow, shows a drop to 4% in the balance of directors optimistic about their companies’ outlook, from 24% three months ago.

Investment intentions have also fallen sharply, with the balance of directors optimistic about investment prospects dropping from 17% to minus 3%. The survey showed that profit expectations had also weakened while pricing pressures were flat.

“This is a pretty gloomy survey with the decline in business confidence worrying,” said Graeme Leach, chief economist at the institute. “The key question now is whether optimism will bounce back because, if it doesn’t, business investment could be hammered.”

Business confidence fell sharply after the September 11 attacks on America. Firms cut down on international travel and shelved investment plans amid fears of a global recession. But confidence gradually returned during 2002 as the central banks cut interest rates.

The question raised by the Institute of Directors’ report is whether the drop in confidence results in firms seriously reining back. Only 15% of directors surveyed said the credit crisis had resulted in a slowdown in sales, while 6% reported an increase in the cost of borrowing and 7% said they had faced borrowing restrictions.

It comes as another report, from the British Chambers of Commerce (BCC), warns that growth will slip to 1.9% next year from 3.1% this year, and urges the Bank of England to cut interest rates urgently to head off a sharper slowdown.

“UK prospects have worsened considerably as a result of the global credit crisis and the threats facing the international banking system,” said David Kern at the BCC. “The dangers facing the UK economy are much bigger.

“Policy options have narrowed, but the immediate priority is to avoid a nasty downturn. Near-term inflationary pressures are fairly small, so the correct policy response is to cut interest rates in the near future, even if some of the cuts will have to be reversed at a later date.”

The BCC assumes that the Bank’s monetary policy committee will cut interest rates to 5.25% by the middle of next year. He thinks there is a good chance a cut could come next month.

Markets are awaiting the Bank’s own guidance on that, with its quarterly inflation report on Wednesday. It is expected to reveal that the downside risks to growth have increased, but there are also some heightened worries about inflation because of the rise in oil and food prices.

Inflation figures this week will provide new evidence on the Bank’s room for manoeuvre. Analysts expect inflation to edge up from 1.8% to 1.9% but some fear it could rise above the Bank’s 2% target.

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