The worsening economic climate has left British confidence at its lowest level in 16 years, a new survey has confirmed.

More than 40 per cent of businesses reported a drop in sales in the second half of the year while almost one third (29 per cent) of firms experienced cash flow problems, according to the new Business in Britain survey from Lloyds TSB Commercial.

And while cuts in inflation and VAT had been hoped to stimulate increased spending, the survey’s business confidence index – which measures firms’ expectations of sales and profits over the coming six months – has dropped to -32 per cent, the lowest since the survey began.

“British businesses have had a rough ride in recent months,” commented John Maltby, managing director of Lloyds TSB Commercial.

“With demand on a downward spiral, it’s small wonder that they are feeling pressure on their finances and that confidence is at such a low ebb.”

Though many of the 3,450 firms surveyed predicted a testing 2009, those involved in exporting goods may have cause for optimism, with the survey’s export balance reflecting the fact that more businesses are boosting, rather than cutting their exports.

International trading could also still flourish, the survey indicated, with 26 per cent of respondents expecting their trading position to improve over the next six months, a rise from 20 per cent in the last survey.

But lower profits seem to be on the horizon for many, the balance of firms expecting higher, rather than lower profits over the next six months down to -42 per cent, a dramatic plunge from -25 per cent in July last year.

More than half of those surveyed (55 per cent) expect profits to fall in the first half of 2009, with only 13 per cent predicting an increase.

“The cocktail of rising prices and falling demand is taking its toll on small businesses,” Mr Maltby added.

“It’s only the fact that businesses have been careful not to overstretch themselves, as they did in the late 80s and early 90s, which is preventing even more firms from facing cash flow problems.

“But those businesses that take the right advice and support and grasp the opportunities such as evident still in some export markets can not only survive but build long term business in this climate.”