Inflation worries drive sentiment down while trading prospects remain resilient

Businesses reported a fall in confidence this month, declining three points to 25%, according to the latest Lloyds Bank Business Barometer. This puts confidence below the long-term average (28%) for the first time since March 2021 when the economy emerged from the second COVID-19 wave. 

Despite the more challenging outlook, businesses’ assessment of their own trading prospects remained relatively resilient, with the net balance for trading prospects for July up three points to 37%.

The fall in business confidence comes as inflation reaches its highest level for 40 years as the cost of living pressures on households continue to grow. 

Businesses stated they are most concerned about inflation (54%), followed by economic slowdown (38%) and tightening labour markets (25%). Although businesses maintain an overall positive view on the economy, it has decreased in recent months as economic uncertainties have gained momentum, with economic optimism remaining positive but dropping by 10 points to 12%. 

The proportion of firms expecting to raise their prices in the coming year increased to match the record high of 58% from April this year (up two points on last month), while an unchanged 5% of companies planned to lower their prices. 

The majority of firms (66%) said inflation is having a negative impact, suggesting that they have been able to pass on some, but not all, of their rising costs to their customers. This compared with only 9% of businesses indicating it is having a positive impact. 

Businesses reported a pickup in their expectations for wage growth in the year ahead with 17% of firms expecting average pay growth of 4% or more for their employees, an all-time high since tracking this data in 2018. In contrast, the share anticipating pay growth below 2%, including pay freezes, fell to a four-month low. 

Hann-Ju Ho, Senior Economist Lloyds Bank Commercial Banking, said: “Business confidence declined this month, suggesting that economic headwinds are becoming more forceful. Despite this, firms’ assessment of their own trading prospects showed some resilience in the face of a challenging environment. Meanwhile, price pressures have shown no clear signs of a downward trend and there appears little sign yet that wage pressures are abating.”

Regional and sector insights

Confidence increased in four of the UK’s twelve regions and nations this month, up from one last month  with rises in the East of England (46%/+15), the West Midlands (38%/+8), Wales (30%/+7) and the North East (31%/+4). These regions were all well above the UK average (at 28%) and in the top five of the most confident UK regions, along with London where confidence was unchanged at 35%. The remaining seven registered lower confidence, with the biggest decline in the North West (18%/-24). 

Business confidence declined across all four of the sectors in July, reflecting lower optimism about the economy. Confidence within manufacturing declined the most this month (20%/-12), with firms citing moderating trading prospects and a notable drop in economic optimism, but also issues with inflation and supply bottlenecks. There were small falls in confidence for construction (28%/-2), retail (25%/-6) and services (24%/-1).  

Paul Gordon, Managing Director for SME and Mid Corporates, Lloyds Bank Business & Commercial Banking, said: “With economic pressures gaining momentum, this is undoubtedly a challenging time for businesses.

“Naturally, concerns around an economic slowdown continue to bear down and it is important that firms keep a tight rein on input costs where they can and a close watch on profit margins in what are already tough conditions.

“As many businesses feel the strain, they should look to lean on their support networks, including their banks to help them structure their finances to make sure they are in the best position possible for the months ahead. At Lloyds we remain by the side of businesses to deliver that support.”