THE UK economy is continuing to show signs of slowing down as business confidence falters, a survey shows today.

The BDO Stoy Hayward business report said both optimism and output were weak among companies, suggesting Chancellor Gordon Brown would miss his economic growth target of 3 per cent to 3.5 per cent, and instead post just 2.2 per cent for the third quarter of 2005.

At the same time the group said its inflation index had also fallen sharply this month, and it said a cut in interest rates may now be justified, although it expects the cost of borrowing to remain on hold until at least August.

The BDO output index, which predicts GDP movements a quarter ahead, slipped to 99.4 in June from 100 the previous month.

It said the outlook for the manufacturing sector had remained particularly bleak, while the service sector had also started to falter.

At the same time its optimism index, which predicts GDP in two quarters time, remained well below the levels seen at the beginning of the year, and suggested growth of just 2.9% in the fourth quarter.

Meanwhile business advice group Grant Thornton said confidence among mid-market venture capitalists dipped significantly during the second quarter of the year.

In the first three months of the year nearly all venture capitalists predicted deal values and volumes would either increase or stay the same, but during the second quarter only 65% thought values would rise and 70% thought volumes would increase.

At the same time nearly a third of venture capitalists thought volumes would be down, compared with just 2% at the beginning of the year.

The healthcare sector was seen as the most likely sector for mergers and acquisitions, followed by businesses services and financial services.

However, research from Lloyds TSB showed that consumers were becoming more confident about their prospects despite signs that the economy was slowing.

Nearly a quarter of people felt more secure in their jobs than they did a year ago, up from 22% last month.

But at the same time 61% of the 2,000 people questioned thought interest rates would be higher in 12 months time, although this was the lowest figure since November last year, and two-thirds thought prices would rise further in the coming year.