CONFIDENCE among business leaders in the west about the future of the UK economy has taken an up-turn.

But an underlying air of caution remains, according to West Business Watch, the monthly business confidence survey run by the south west office of accountants and business advisers Deloitte & Touche.

Fifty per cent of business leaders in the west say the future of the UK economy is looking brighter.

This is the highest ever recorded by West Business Watch and is a 39 per cent increase on the previous month.

In contrast, 19 per cent are less optimistic about the economy.

Martin Hagen, senior partner at Deloitte and Touche in the south west, said: "Economic strength is closely linked with political stability, so it is not surprising that the caution that we have seen over the past few months is now tapering off.

"This surge in confidence reveals that west business leaders have been closely monitoring the political climate and as the troops return home their optimism is rising."

The survey reveals that 63 per cent of company directors in the west expect their order books to remain the same over the next six months, 25 per cent expect them to increase and 12 per cent to decrease.

But confidence is far from fully restored, with only six per cent expecting more capital investment and 31 per cent expecting less.

More than half of west companies reported that their workforce will remain the same over the next six months.

Fewer companies are expecting to downsize over the coming months, with 31 per cent reporting they will employ fewer people, down from 39 per cent.

Mr Hagen said: "Optimism in the economy is on the rise, but given the roller-coaster state of current global markets and economies, it appears that west businesses are playing it safe and maintaining their current level of operations."

Despite current economic conditions, high levels of business failures, the war in Iraq and the increase in National Insurance contributions, 94 per cent of companies plan to award pay increases this year, ranging from two per cent to four per cent.

"Since 59 per cent of west boardrooms reported that recruitment remains difficult, we wanted to see how this affects what companies are planning for pay, bonuses and benefits," said Mr Hagen.

Of the companies planning to award pay increases, only 19 per cent said it was a reflection of increased productivity or profits.

Most admitted that the increase had more to do with strong competition for recruiting and retaining staff with key skills.