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Business leaders are more optimistic about 2010

Adding weight to news that Britain has stumbled out of recession, the latest Ipsos Mori Captains of Industry poll suggests business leaders are more optimistic about the UK economy than at any time over the past six years. This survey of board-level directors at the top 500 UK companies has been taken as a sign the UK will finally emerge from the most enduring recession on record and begin its long-awaited recovery. But how excited should we get about this new-found optimism?

Ostensibly it should be a good thing. Business leaders make investment decisions and if they are optimistic, they are more likely to hire people, give capital to new projects and generally grind the economic cogs. They should have a better insight into the economic environment because they are at the front line and they know whether people are buying their products now, whereas GDP or retail sales statistics are invariably retrospective.

But 2009 has amply demonstrated there is always a reason to be gloomy. For a start, it may have been the most optimistic reading in six years, but only 36% of the business leaders thought the economy would improve in 2010. This is up from 4% this time last year, but it’s hardly a ringing vote of confidence – and almost 30% still think it will decline.

Also, business leaders are not always the best judges of the state of the economy. Remember all those banking chief executives saying everything was rosy and paying out chunky dividends, just before huge black holes were uncovered in their accounts and they were forced to beg money from their shareholders and, at times, from the taxpayer? Not all business leaders are similarly misguided, but they are certainly not uniformly reliable. In fact, certain fund managers base their entire investment processes on the fact business leaders tend to be weak at predictions.

The survey also only looks at larger companies, which have not been as hard-hit in the recession – most importantly, they have had access to funding, which has been the real problem for smaller companies – and a similar poll of smaller company management would be unlikely to be so favourable.

It is better that business leaders are optimistic rather than pessimistic, but this does not yet suggest the problems for the UK are over. Ironically, the best news was probably that only around 20% of business leaders believe the Government’s actions will improve the economy. If the Government’s actions are not stimulating the economy, then we can do without them and there is no huge crash in prospect when VAT rises or other measures are withdrawn. This may be the best thing to cling on to as 2010 begins.

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