British businesses have started the year with far more optimism, according to a new survey showing that confidence hit its highest level in six months in January.
The latest Lloyds Bank Business Barometer suggests that overall confidence among UK companies increased by five points to 22 per cent this month, moving closer to the long-term average of 28 per cent.
Confidence is an important economic indicator and driver of growth, because the more optimistic companies feel, the more likely they are to invest. The Bank of England follows confidence measures closely to gauge when to raise interest rates. The Bank is expected to raise the base costs by half a percentage point on Thursday, which will push the rate to 4 per cent.
The increase in business confidence was driven by a more optimistic assessment of the wider economy, with almost half of the businesses surveyed expressing greater optimism.
Hann-Ju Ho, a senior economist with Lloyds Bank commercial banking, said: “Business confidence continues to improve following the December boost.
“Firms are clearly more optimistic about the wider economy and this is driving the increase, helped by precursory signs and other cost pressures may be easing.”
He added: “It is still a tough environment for business, with high energy bills remaining a concern during the winter months, but there are grounds for optimism for 2023 if inflation starts to trend lower.”
Lloyds’s monthly survey, which started in 2002 and surveyed 1,200 companies from January 1-15, said that the number of management teams who are confident about their prospects was broadly unchanged, with a fifth of bosses anticipating weaker business activity offsetting the 46 per cent expecting stronger trading.
In response to rising input costs, pricing expectations among businesses fell from December’s record high and for the first time in three months, down three points to 55 per cent.
For a second month in a row confidence in the manufacturing and services sector grew, with manufacturing rising 15 points to 28 per cent and services increasing by seven points to 25 per cent.
However, sentiment in the construction industry dipped two percentage points to 27 per cent because of falling property prices and waning demand.
Confidence in the retail sector fell for a second month in a row to 7 per cent, the lowest level since February 2021, as high inflation and the associated cost of living squeeze pile the pressure on bosses and shoppers.
By region, business confidence in the northwest, northeast, Wales, Northern Ireland and London was stronger, with companies in the capital being the most positive, rising 29 points to 37 per cent.
Sentiment, however, fell in the East Midlands, the southwest, southeast and Yorkshire and Humberside.
Companies’ expectations of having to pay their staff more eased slightly in January. A quarter of the businesses surveyed anticipate having to increase wages by 3 per cent or more, while the proportion of companies anticipating wage inflation of 5 per cent or more fell.
Two fifths of businesses surveyed said that they were planning to recruit more staff in the coming year, however 23 per cent said they expect to lay off people.
Paul Gordon, managing director for relationship management at Lloyds Bank business and commercial banking, said: “With pay expectations tempering, trade expectations set to improve, and a clever way forward on energy price support this may give businesses a bit more certainty and the confidence they need to inspire investment and promote growth.”
Last week a survey by Deloitte, the professional services company, found that sentiment among consumers rose in the last three months of 2022 as they became slightly more positive about the state of the economy.
Any improvement in the measure is key as economists have predicted that the impending economic downturn will be brought down by a fall in consumer demand as a result of the cost of living crisis, which has seen food prices rising at their fastest rate in more than four decades and a jump in energy bills.
Business confidence bounces back but interest rates will rise