By Daniel Hunter

Businesses in London are less optimistic about the economy and business prospects this quarter, according to the latest CBI/KPMG London Business Survey.

The number of businesses in London that are more optimistic about the economy over the next six months has dropped from 59% three months ago to 42% this quarter. Similarly, only two-fifths of firms in the capital (38%) are now more optimistic about business prospects, compared with nearly half (47%) last quarter.

The top concern for London businesses is lack of economic growth, with regulatory pressures cited as the next biggest concern. Also highlighted for the first time this year is uncertainty over the UK’s role in Europe.

Nevertheless, the survey of 120 companies shows that business expansion plans remain robust, with nearly two-thirds of respondents (65%) planning to extend their operations over the coming year. Almost half (49%) plan to do so in London, an increase of 10% since the last survey, and the highest figure this year.

Lucy Haynes, CBI London Director, said:

“Overall, London has had a good innings in 2014. Throughout the year, firms have been upbeat about the economy and their business prospects, but optimism has dipped recently against the backdrop of a sluggish Eurozone and increased geopolitical tensions.

“The capital’s businesses are raising concerns around the uncertainty of the UK’s role in Europe, so we must continue to explain why British membership of a reformed EU is important to jobs and growth in London and the rest of the country.

“The number of firms looking to expand in the capital is the highest we have seen all year, and expansion intentions as a whole are in good shape.

“London enjoys a fantastic international reputation, but to keep the city globally competitive it’s critical that action to free up land for house building is taken now. It’s also clear that supporting innovation and enterprise in the capital is a priority for business.”

Richard Reid, London Chairman of KPMG, said:

“Despite political events starting to have an impact on confidence in the capital, it is encouraging to see that businesses aren’t backing down from their expansion and investment plans.

“Difficult as it is, it is important that businesses stay focused on their growth plans, over the next six months and do not get distracted by the potential political uncertainties as we head to the polls in May. We need London businesses to drive the economy forward if we are to continue to be the jewel in the crown of economic growth in Europe.

“Despite the cost of living and housing continuing to dominate the concerns for business owners in London, the fact that the great EU debate has made the list of the top five concerns in such a short space of time demonstrates what an important issue EU membership is.”

London’s international reputation continues to run high, with 82% of companies rating the city as a good, or very good, place to do business, and 80% of businesses planning to stay in the city in the future.

More than half of companies (55%) aim to increase headcount over the next six months, whilst only 21% plan to ease it, roughly in line with figures throughout the year.

In order to stimulate growth in the next five years, businesses want to see more support being given to small and medium-sized enterprise (SME) innovation and entrepreneurship (16%).