By Claire West

Business confidence has dropped over the second quarter of 2010, with many small businesses worried that the recovery is still fragile, according to the Federation of Small Businesses' 'Voice of Small Business Index' report.

In a survey of over 1,200 members, the Federation of Small Businesses reported that only a net 4% of respondents believe that business prospects will improve in the third quarter of the year, down from 16% in March.

The survey also suggests that almost 67% of small firms are operating below capacity, with those in the manufacturing sector faring much better than service sector firms.

This further highlights how the UK economy is still some way from a full-speed recovery, with 64% of firms in the South East likely to be working below capacity — more than anywhere else in the country.

With Government proposals to exempt the South East, London and the East of England from the National Insurance holiday for new businesses, announced in the Emergency Budget, the FSB is concerned firms in the region will not start-up and that existing businesses will not have the support they need to grow and take on more staff.

John Walker, National Chairman of the Federation of Small Businesses, said: 'The consensus view from small firms is that the recovery is far from secure and there are significant risks to business growth in the future. With this is mind, as well as the fact that almost 70 per cent of businesses report working under capacity, we encourage the Government to support small businesses to grow and expand'.

'With small firms in the South East most likely to be working below capacity, this shows how wrong the Government is to not include this vital region, as well as the East and London, in its proposals for a National Insurance holiday for start-up businesses. While we support the policy we believe that it should be extended [to cover the whole of the UK]'.

The FSB said that in the face of major spending cuts, the stimulation of private sector job creation was vital - especially for small businesses, which will be 'vital to rebalancing the economy'.

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