Keren Haynes of the BBC's business staff: Firms must create new products

The next 12 months will be difficult for many firms, Sir Clive Thompson, President of the Confederation of British Industry, said in his New Year message.

His warning came as the first annual increase in business failures since 1992 was reported, with a 6.2% increase in failed companies since last year.

Sir Clive Thompson: Recession warning

Sir Clive said 1999 will be dominated by slow economic growth, and urged British firms to start creating new products and services to compete in the next century.

He warned: "There is no doubt that the next 12 months will be difficult for many firms.

"A manufacturing recession seems likely, leading to a slowdown in growth for the economy and will, inevitably, lead to job losses.

"That should only strengthen our resolve to bring about the more stable and prosperous Britain that we all want to see."

And, on the eve of the launch of the single currency, he also warned that 1999 could be "a make or break year" for the UK in Europe. He urged the government not to stand on the sidelines, but to play a major role in shaping the EU.

"I remain convinced that it is crucial for Britain to play a major role in shaping the final outcome of the EU.

"Standing on the sidelines, watching others make decisions that affect us will achieve nothing."

'Tough decisions'

Sir Clive also warned of the need to tackle long-term public spending problems.

"If we are to afford the improvements in education, health care and transport infrastructure, some tough decisions must be made.

"If we are to avoid raising taxes, we must control social security and other spending to begin to introduce more imaginative private sector involvement."

Figures by business information company Dun & Bradstreet show that nearly 200 more businesses are failing each month than at the same time last year.

A total of 38,634 businesses went to the wall, compared with 36,368 in 1997 - an increase of 2,266.

The figure for England and Wales of 34,636 failed businesses has trebled since Dun & Bradstreet first kept statistics in 1980.