Although still positive, the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM) reveals slower growth leading to a reduction in tax receipts for the Treasury.
The BCM Confidence Index is in positive territory but stands at +11.4, down from +15.6 last quarter and lower than the high of +37.3 two years ago.
The number of firms operating below capacity has risen though and indicates a further deterioration in productivity with growth also expected to slow.
Exports, while currently very weak, are expected to improve due to a strengthening Eurozone and a weaker exchange rate with the Euro which, if realised, would be positive news for the government, which have been championing companies to export more.
The decline in confidence points to only modest growth in GDP in Q1 2016, at 0.4 per cent.
Businesses are very careful about how they manage costs and as a result, capital investment growth continues to slow.
Salaries are expected to rise by 2 per cent in 2016 continuing to contribute to consumer spending power due to low inflation, with skills shortages still a challenge but may have peaked.
Michael Izza, ICAEW chief executive says, 'Given recent global economic data, the fall in confidence is not a surprise. The increase in US interest rates by the Fed and the slowdown in China have both led to businesses becoming even more careful about how they manage costs.'
Izza adds that growth is expected to slow and will mean less income into Treasury.
'If that happens, the Chancellor simply won’t meet his deficit reduction target. It will become a three-parliament problem. After a particularly bullish Autumn Statement, the Chancellor has had to row back on the immediate prospects for the UK economy.
'This presents new challenges for him and how he responds in next month’s Budget. Companies are feeling the pressure and now would not be a good time to increase costs on top of a ranch of regulatory changes.'
Robert Hannah, chief operating officer at Grant Thornton says that confidence is often a self-fulfilling prophecy, and while confidence may have fallen back this last quarter, business is still relatively positive.
'Within the global arena, our findings show that alongside Ireland, UK optimism is the highest in Europe. All this coupled with the current competitive exchange rate and the increased spare capacity within business provides a great opportunity for UK business to steal a march on other economies,' Hannah adds.
'To do this they need to turn their sights to exploiting the opportunities in overseas markets and invest in capital investment and R&D over the next 12 months.'
Future export sales are expected to grow in line with domestic sales, after a period of under-performance.
Employment growth has slowed to below 2 per cent but firms expect this to improve in the year ahead as the UK heads towards full employment. Despite this businesses only expect salaries to increase by 2 per cent in 2016, similar to those reported in 2015.
Further reading on confidence
See also: Confidence key to women in business