The latest installment of a survey that is conducted monthly on behalf of Lloyds TSB Corporate Markets by Continental Research portrays general pessimism in the service sector. Over 200 companies with business turnover above a million reported that they expect to see less profit in the next year. An expectation of business increase rather than degrease in the next year fell to 45 per cent, down from 61 per cent reported only a month ago. According to the Lloyds TSB Corporate Markets Business Barometer this level of pessimism was not seen since February 2006.



The press release pinpoints the service sector as the most pessimistic one, with only 39 per cent of companies expressing optimism about success and profit of their operations.

To fully grasp the sudden, silent, relatively contained, yet all-prevailing panic one needs only to remember that in May 76 per cent of the surveyed companies expressed concern about financial success of their operations. Unexplainably, if not contrary to such factors as base rate increase etc, firm’s confidence in other-all British economy increased by close to ten per cent.

“Despite firm’s apparent upturn in confidence in the strength of the UK economy, it is obvious that they are increasingly apprehensive about the future. Sentiment seems to be that the combination of higher interest rates, a stronger pound and a reacceleration of input costs will squeeze profit margins," said Trevor Williams, chief economist at Lloyds TSB Corporate Markets.

Corporate confidence in the over-all health of U.K. economy is at least partially caused by industrial and distribution companies, eagerly eyeing the developing global growth with the US economy blossoming and strong local and foreign markets. It is possible the confidence in the US economy and the optimism, associated with it, are misplaced. Due to the issues with sub prime mortgage market and others, American dollar dramatically fell this week, to a multiyear low. “The inflation reports and Ben Bernanke's testimony are by far the main market events of the week and the dollar is likely to drift, without a very clear direction, until we see those reports," said Matthew Strauss, a currency strategist at RBC Capital in Toronto.

Trevor Williams explains the difference in attitude expressed by service, and industrial and distribution companies: “Concerns about interest rates weight heaviest on the service sector, suggesting firms believe higher rates will sap consumer confidence and hit their sales. This may indicate that last week’s rate may signal the final chapter in the MPC’s efforts to slow the economy and so curb price inflation."

“In addition, although firm’s overall view of the UK economy is positive, the service sector also reported a slump in optimism about general economic growth. The balance of service firms expressing confidence in the UK economy fell by 19 per cent last month, dovetailing with the view that any shock that hits them hard is also one that hits the domestic economy. However, as the overall view is buoyed by the industrial and distribution sectors, this implies that economic growth should slow but not collapse."

The fact that it is the optimism of the industrial and distributional sectors what “buoys" the overall view is unsettling to say the least. However, if the chief economist at Lloyds TSB Corporate Markets (considering that Lloyds TSB is the winner of the Euromoney Awards for Excellence which is one of the most influential awards within the banking industry) predicts a slum,and not a disaster, perhaps the situation is far from dire. Our history is overflowing with examples of bravery and/or sheer optimism shifting the current of the events. Think hard, think positive.