This is according to the latest findings from the Federation of Small Businesses’ ‘Voice of Small Business' Index.
The Index, comprising some 1,600 responses from businesses across the UK, recorded a score of -24.5 - the lowest level since the Index started in 2010 and is a fall of some 15.2 points over the quarter.
Given that economic recovery is relying on business investment to create jobs and support the recovery, the ongoing weak sentiment is worrying.
And, with one in eight (12.6%) firms expecting a worsening economic situation in the coming three months, the FSB is calling on the Government to act on policies and initiatives already announced to help boost small business confidence so that they can invest and grow.
While the short term prospects look weak, an improving inflation outlook will certainly help confidence over the year. The FSB believes inflation will fall back sharply this year as the impact of 2011's VAT rise lessens, with recent energy price cuts an encouraging sign inflationary pressures are finally easing.
Falling inflation should help cash-strapped consumers and give more room for discretionary spending. Businesses will benefit too as the cost pressures they faced in 2011 fade, which should feed into better margins and improved profitability.
The FSB believes reforms announced by the Government should help too. It has supported many of the policies outlined in the Growth Reviews and the Autumn Statement, such as measures to encourage bank lending to small businesses and boost investment through the seed enterprise investment scheme. Proposed reforms to the planning system and government procurement contracts to increase small firms' access were steps in the right direction too.
However, many of these measures will take time to feed-in. The FSB believes it is now key for all levels of government is to focus on implementation: small firms need to see action to match the rhetoric and to see tangible actions that will benefit their businesses and permanently change the business environment for the better.
John Walker, national chairman, Federation of Small Businesses, said: "The message is clear - things are going to get worse before they get better.
“But, we are hopeful that as the inflationary pressures lessen in 2012, that businesses will become more confident. There are some good policy proposals in the pipeline too.
“However, the Government needs to quickly put in place the actions that it has promised. Small firms have heard what the Government has to say but are still waiting to see implementation.
“We believe that must be the Government's priority: to make 2012 the year of doing, with the aim of creating a dynamic business landscape in which our entrepreneurs can grow and flourish."
Charles Davis, managing economist, cebr, said: "The Q4 survey shows that small businesses are fighting a tough battle against a worsening economy. On the upside, falling inflation should ease the pressure on margins and should allow interest and mortgage rates to stay low for at least the next two years."
