UK business confidence last month tumbled to its lowest point in 21 years, signalling economic contraction, data revealed Monday.

Confidence fell from 90.3 in December to 88.9 in January, according to the BDO Optimism Index which predicts business performance two quarters ahead.

It is the eight month in a row that the reading has remained below 95.0 - the level which indicates economic growth.

"This suggests the economy will struggle to grow in [the first quarter of 2013] which, following the recently announced negative growth of [the fourth quarter of 2012], poses the risk of a triple-dip recession," BDO said.

However, there are some signs of improved confidence in employment.

BDO's Employment Index, which measures companies' hiring intentions over the next two quarters, rose to 95.1 in January from 93.0 in December, taking the index above the 95.0 mark. It is the first time the index has stood above 95.0 since April 2012 and supports the latest Office for National Statistics Labour Market figures which saw unemployment fall 7.7% in the three months to November, down from 7.9% in the previous quarter.

Manufacturing output and optimism also rose in January. Optimism for manufacturing firms climbed to 95.2 in January from 91.9 in December. The Output Index score increased to 92.3 in January from 90.6 in December, showing strength in manufacturers' order book.

"In spite of a strengthening Labour Market, business confidence continues to weaken, and improved hiring intentions are not translating into growth plans," said BDO Partner Peter Hemington.

"It seems the damaging effects on businesses of five years' zigzagging economic growth, has left them wary of making concrete plans for expansion and resigned to the 'new normal' of economic stagnation.

"To end this cycle, it is imperative that the government implements plans to expedite growth. Without growth incentives, we will continue to see UK businesses reluctant to invest and expand, which poses a grave threat to the UK's economic recovery."

RD

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