UK business confidence is growing, with the number of firms in difficulty at its lowest level in more than two years.

The Sunday Times-Mandis agony index, which measures signs of corporate distress from a database of 100,000 companies, showed a 10.3 per cent drop in the number of ailing businesses from June to July.

Its findings echo other economic indicators published recently which suggest that despite the continued strength of sterling, Great Britain plc is performing strongly.

Compared with the same month in 1999, the July figure was 8.6 per cent lower, and the lowest it has been since June 1998, when there was concern about the state of the Asian economies.

"Corporate distress" includes redundancies, profit warnings, weak trading statements and major restructuring programmes.

In the last two years, pressure has increased on retailers who have been forced to cut margins and increase efficiency because of increased competition on the UK's high streets.

Ray Murphy, managing director of business information group Mandis, said: "In 1998, a healthy mid-year position was followed by a rapid deterioration through to the year-end.

"Last year also saw a worsening from summer to autumn, though not on the same scale.

"Whether this pattern will be repeated in the months ahead remains to be seen."

City analysts Merrill Lynch predicted a continuing downward trend in unemployment.

They forecast house prices will show a further degree of cooling and that retailers will find it hard to boost margins by putting prices up.

These reports will collectively put pressure on the Bank of England's monetary policy committee not to increase the base interest rate of six per cent when it meets next month.