Business confidence hits highest level since early 2022

1st September 2023

Confidence among British companies has risen to its highest level since before Russia invaded Ukraine, according to the Lloyds Bank Business Barometer. The survey shows that optimism has risen by 10 per cent to 41 per cent, the highest level since February 2022.

The 10-point increase is the largest month on month rise since March 2023. Business sentiment was largely driven by a more upbeat view of the wider economy, after the latest rise in base rates of 25 basis points was lower than the 50 basis points increase some firms had been expecting. This led to an overall 15-point rise in economic optimism to 36%.

The August survey was conducted between August 1 and August 15, with most responses taken after the Bank of England’s decision on August 3 to raise the base rate 25 basis points to 5.25%.

The rise in confidence followed a six-point dip in July to 31%, though this level was above the long-term average for the Barometer of 28%.

However, the rise in economic optimism was not consistent among those surveyed last month. Smaller businesses and mid-sized firms (turnover between £250,000 and £3 million, and £5 million to £25 million respectively) expressed a greater rise in optimism (smaller firms, 37% up 17 points, mid-sized firms, 39% up 17 points) in the economy than larger businesses (turnover of more than £25 million) (37%, up six points), reflecting bigger companies’ exposure to global demand.

Firms’ trading prospects rose for the third month in a row, with 57% (up two points) of firms anticipating stronger activity in the next 12 months, compared with 11% (down two points) expecting weaker outcomes. This results in the net balance increasing four points to 46%, the highest level since December 2017.

However, manufacturers and large firms with turnover above £25 million were more pessimistic about their trading prospects. Manufacturers trading prospects fell 11 points to 35%, and large firms similarly decreased 10 points to 48%.

Hann-Ju Ho, Senior Economist Lloyds Bank Commercial Banking, said “The bounce in economic optimism this month is the standout point. Our analysis shows that businesses felt relief that interest rates may be reaching their peak, alongside hopes that measures to tackle inflation are having an impact. With trading prospects remaining stable, and hiring and wage intentions also rising, the macro environment for small businesses and those outside the manufacturing sector is more upbeat.”

“From the data, large firms and manufacturers are experiencing some degree of caution, which is likely to reflect the wider global economic environment and, for manufacturing, the rotation of spending towards services.”

The construction, retail and service sectors all saw a rise in business confidence in August. Services gained 12 points to reach a 22-month high of 42%, while retail firms were up nine points to 44%, an 18-month high. Construction firms’ confidence also increased by 11 points to a four-month high of 42%. In contrast, manufacturing confidence fell for a second consecutive month with a 4-point decline to 30%, taking it to the lowest level since April 2023.

Paul Gordon, Managing Director for Relationship Management, Lloyds Bank Business & Commercial Banking said “We’ve seen a strong rebound in confidence, now higher than at any time since the Russian invasion of Ukraine and well above the long-run average. Business optimism is helped by the outlook on peak interest rates and the direction of travel on inflation.”

“However, this month we are seeing a clear difference in confidence levels between large and smaller firms. Larger firms are continuing to feel the headwinds of the overall macroeconomic climate, while smaller firms, which are more likely to trade locally, are benefiting from the counter-inflationary measures and relative economic stability. We are here to support businesses of all sizes and can offer expertise not just for those who trade in the UK, but internationally as well.”

“Manufacturing confidence in the UK has fallen this month once again, reflecting the overall challenges for the sector in most major economies. Some manufacturing businesses continue to experience challenges with recruitment, resulting in upward pressure on wages. The Bank of England will need to consider carefully in its next decision for interest rates.”