Business confidence increases despite signs of retail slowdown

Businesses reported a rise in confidence for the first time since February and the start of the war in Ukraine, according to the latest Lloyds Bank Business Barometer. Confidence increased five percentage points to 38%, the highest since February 2022 and 10 points above the long-term historical average of 28%.

Confidence in the retail sector, however, fell two points to 27%, its lowest level since March last year amid the widely held concerns on the squeeze on household incomes and despite fading worries about COVID-19.

Despite the increase in overall business confidence, 46% of businesses cited higher costs as one of their biggest concerns over the next six months, while 34% cited economic slowdown. In contrast, COVID-19 concerns have decreased to 20% since 45% at the start of the year. As a result, businesses are likely to respond by focusing on building in financial and operational resilience, including through strong working capital management and optimising inventory levels, while working closely with their suppliers and customers. 

According to the Barometer, employment intentions increased for the first time in three months, with 53% (rising nine points) of firms expecting to increase their workforce. This is the second highest level seen since the start of the pandemic. Hiring intentions appeared particularly strong for construction firms, with 61% expecting to increase their work force compared to 45% of firms in consumer-related sectors.

For the fifth month in a row, the proportion of businesses planning to increase their prices continued to rise, with more than half of firms (57%) anticipating higher prices for their products or services. This is compared to 5% (up from 4%) of businesses that are planning to reduce their prices, highlighting that firms appear to be rebuilding their margins by raising their prices in response to rising costs.

Hann-Ju Ho, Senior Economist Lloyds Bank Commercial Banking, said: “Business confidence improved this month and firms in general seem able to rebuild some of their margins through price increases. However, they also report several challenges ahead, including concerns around higher costs and an economic slowdown. More immediately, consumer-facing industries, such as retail, are not feeling the same confidence uplift amid the widespread reports of a squeeze on household incomes.”

Regional and sector insights

Eight of the UK’s twelve regions or nations reported higher business confidence this month, with businesses the most positive in London (up 23 points to 63%), and the West Midlands (up 11 points to 53%).

Strong gains were also seen in the North West (up 12 points to 44%), Scotland (up 14 points to 42%s) and Northern Ireland (up eight points to 41%).

In contrast, the confidence of companies in the East of England fell 20 points to 14%, while Yorkshire & Humber and the South East, both saw falls of seven points to 34% and 23%, respectively.

From a sector perspective, retail confidence fell two points to 27%, remaining lower than the all-sector average of 38% in the last three months. The confidence level is also the lowest since March 2021 as pressure on household real incomes weigh on spending prospects. In contrast, there was a 21-point rise in construction to 54%, while manufacturing sentiment remained resilient, up two points to 45%. Confidence in the services sector reached a three-month high, increasing 4 points to 36%.

Paul Gordon, Managing Director for SME and Mid Corporates, Lloyds Bank Commercial Banking, said: “It is reassuring to see a number of positives coming out this month as businesses show that despite challenges, confidence is increasing once again. However, it is understandable that there continues to be caution around the future, given inflationary pressures and potential for economic slowdown. 

“In response, businesses should ensure they keep a tight rein on input costs to help support profit margins and keep working closely with their suppliers and customers to ensure any changes in supply or demand are noticed in good time. 

“If businesses are struggling or are unsure of what action they need to take, I would encourage them to reach out to seek advice. We remain by the side of businesses to help them navigate any challenge they face.”