Manufacturing may be starting to pick up

The CBI has predicted almost 40,000 jobs will go in the private sector over the coming three months as profits come under pressure and any spare capacity is axed.

"Firms across the UK are struggling to keep their heads above water, with severe job shedding predicted in almost every region and confidence low," said Doug Godden, CBI Head of Economic Analysis.

Despite the end of the Iraq war, just three regions posted a rise in total orders, according to the CBI's regional trends report.

Only Northern Ireland and London and the South East avoided a decline in confidence.

The sharpest drop was in Wales, the report by the CBI and Experian Business Strategies said.

Optimism returning?

But a broader survey for accountants BDO Stoy Hayward, painted a slightly rosier picture of the UK's economy.

BDO's Optimism Index, which predicts GDP growth two quarters ahead, had returned to levels seen at this time last year.

But order flows also remained patchy as businesses focused on improving profit margins.

The BDO "poll of polls" survey takes the average results of the UK's main business surveys over the past three months, with more weight given to the data which has proved reliable in the past.

Interest rates

Ian Mitchell, senior economist at the centre for economic and business research (CEBR), which carried out the BDO study, said: "There is a slow recovery in business confidence.

"If there are no further external shocks to knock things off course I cannot see any reason why it will not continue to accelerate."

The Bank of England is expected to leave interest rates untouched at 3.5% when it meets later this week.

Some experts predict the next move for interest rates could be upwards as world business conditions begin to improve.

'Elusive recovery'

In a sign prospects are improving, Britain's struggling manufacturing sector grew in July after eight consecutive months of contraction, according to a survey last week.

The Chartered Institute of Purchasing and Supply (CIPS) said its monthly manufacturing index for July climbed to 50.9, up from 49.5 in June, and its highest reading since May last year.

But Doug Godden, the CBI's head of economic analysis, said many firms were still feeling the pinch.

"Firms across the UK are struggling to keep their heads above water, with severe job shedding predicted in almost every region and confidence low."

He said further interest rate cut may yet prove necessary later in the year should the elusive global recovery fail to materialise.