Business confidence stabilises after three month decline

Business confidence stabilised in September after falling for three consecutive months between June and August. The index remains at 16%, its joint lowest level since March 2021, according to the latest Lloyds Bank Business Barometer.

While business confidence remained below the long-term average of 28%, it is above the lowest levels seen in 2020 during the first COVID-19 wave (-33% in May 2020). Since companies were surveyed before the UK government’s Fiscal Statement on 23 September the effect of the announcement on business confidence will be seen in next month’s data.

A tight labour market saw wage expectations increase, with 9% (up 4 points)  of businesses now expecting to award a pay increase of at least 5% in the coming year. In addition, almost a third (29%) of businesses anticipate a 3% wage growth in the next twelve months - a new high up from 26% in August and nearly triple the 10% level in 2019 seen prior to the pandemic. 

Staffing expectations for the year ahead were stable this month, with a one-point rise to 39% for companies anticipating an expansion of their workforce. However, this was countered by 23% (up one point) expecting to reduce their headcount.

Businesses’ trading prospects remained broadly unchanged at 26%, with a one-point rise in businesses expressing prospects of stronger activity, which was offset by the same one-point rise in companies reporting a weaker outlook. Regarding the wider economy, an unchanged 41% of businesses indicated greater economic optimism. However, 36% (up two points) were more pessimistic, resulting in a two point decrease to a 19-month low of 5% for overall economic  optimism. 

Inflationary pressures meant the net balance of businesses intending to raise prices in the coming year reached a new high of 55% (up four points from August). This overall level reflected that 59% (up three points) of firms anticipate price rises for their product or service and 4% (down one point) expect a reduction. 

Hann-Ju Ho, Senior Economist, Lloyds Bank Commercial Banking, said: “It is encouraging to see business confidence stabilising after a three-month decline. Firms’ assessment of their own trading prospects also remained steady and continues to show some resilience during turbulent times. Yet, cost pressures remain, as more businesses look to raise prices to help protect their margins while wage pressures show little sign of abating at this stage. With the recent volatility in financial markets as well as the Government’s Growth Plan and energy cap announcements, it will be interesting to see how these measures affect business confidence.” 

Regional and sector insights

In line with recent monthly trends, business confidence was strongest and remained above the UK average in London (33%), the North East (30%) and the West Midlands (19%). The survey revealed some short term volatility in some parts of the country, including rises in the South East (15%) and Scotland (15%) from previous weak levels while, in contrast, in the North West (14%) and Yorkshire & the Humber (11%) confidence decreased.

Elsewhere, confidence levels stayed below the national average. There was a fall in the South West (0%), but modest changes in other areas including the East Midlands (9%), Northern Ireland (7%), the East of England (1%) and Wales (-4%). However, when looking at the average figures over the past three months, these regions confidence levels are more in line with the national average, for example the East of England three month average is 16% while Wales is 9%. 

Business confidence rose by two points in both the retail and service sectors (15% and 17% respectively), however both these figures are close to 12-month lows. Manufacturing and construction firms saw their lowest levels of business confidence this year, down two points in manufacturing to 14% and down 16 points to 10% in construction. This was driven by overall falling optimism in the economy. 

Paul Gordon, Managing Director for SME and Mid Corporates, Lloyds Bank Business & Commercial Banking, said: “Firms should take heart that nationally, business confidence has stabilised, while recognising that wage pressures may continue for some time. However, it is important to note that this data was collected ahead of the recent Fiscal Statement and the current market volatility, where the effect on confidence will be seen in next month’s data.

Keeping a watchful eye on out-goings, especially energy bills as we head into the winter months, will ensure businesses are in the best possible position and right now businesses will be taking on board what the currency position means for their business models. 

“While capital and cash flow management are undoubtedly vital during this time, we would encourage businesses to reach out to their networks for support if they find themselves struggling. At Lloyds we remain by the side of businesses to help deliver the support firms needs to navigate these challenging times.”