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UK business confidence rises but cost fears and economic worries weigh

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UK business confidence hit highest since February this year. Photo: Dominic Lipinski/PA
UK business confidence hit highest since February this year. Photo: Dominic Lipinski/PA

UK business confidence rose for the first time in three months and since Russia's invasion of Ukraine, but firms' fears over rising costs and economic slowdown increase.

The latest Lloyds Bank (LLOY.L) Business Barometer shows 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, fell two points to 27%, its lowest level since March last year amid concerns over the squeeze on household incomes and despite fading worries about COVID-19.

"Consumer-facing industries, such as retail, are not feeling the same confidence uplift amid the widespread reports of a squeeze on household incomes," said Hann-Ju Ho, senior economist at Lloyds.

Despite the surge, 46% of respondents cited higher costs as one of their biggest concerns over the next six months, while 34% flagged economic slowdown.

In comparison, jitters over the coronavirus pandemic decreased to 20% from 45% at the start of the year.

Image: Lloyds Bank Business Barometer
Image: Lloyds Bank Business Barometer

"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," Lloyds said.

Read more: UK retailers report flat sales and gloomy outlook

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.

Image: Lloyds Bank Business Barometer
Image: Lloyds Bank Business Barometer

Employment intentions jumped for the first time in three months, with 53% of firms expecting to increase their workforce — a rise of nine points and the second highest level seen since the start of the pandemic.

Hiring intentions appeared particularly strong for construction companies, with 61% expecting to increase their work force compared to 45% of firms in consumer-related sectors.

Regionally, confidence was up in eight of the 12 regions across the country, compared to seven in April, and was highest in London, the West Midlands and the North West.

Read more: UK economic growth falls in April as inflation hits demand

Paul Gordon, managing director for SME and mid corporates at Lloyds, 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."

Watch: How does inflation affect interest rates?

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