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UK business confidence falls to 19-month low after chaotic mini-budget

Former chancellor of the exchequer Kwasi Kwarteng. Business confidence fell in October
Overall business confidence fell by one percentage point to 15%, the lowest level since March 2021, after Kwasi Kwarteng's mini-budget. Photo: Toby Melville/Reuters

Business confidence in the UK tumbled to a 19-month low in October after Kwasi Kwarteng’s mini-budget spooked financial markets and sent the pound to its weakest level against the dollar (GBPUSD=X).

According to the Lloyds Bank (LLOY.L) business barometer, overall confidence fell by one percentage point to 15% — the lowest level since March 2021.

The survey, which was conducted between 3 and 17 October, showed that over a third (39%) of respondents felt pessimistic about the economy, up from 36%, and was the fifth straight month to show a decline in optimism.

Business confidence remained below the long-term average of 28%, but remained above the lowest level of -33% seen in May 2020 during the first COVID wave.

However, almost half of businesses reported better trading prospects, up two percentage points to 46%, with just 19% of firms preparing for worse trading conditions, creating a net balance at 27%.

Read more: FTSE 100: NatWest clocks £1bn profit on rising interest rates and mortgage misery for millions

Despite the tight labour market, firms’ expectations regarding their own staff levels for the year ahead improved for the first time in five months.

Some 42% of businesses anticipate a higher headcount, up from 39% previously, while 21% forecast a smaller workforce.

Wage expectations also eased this month, with businesses planning to increase salaries by 3% or more slipping by three percentage points to 26%.

The upward trend in pricing expectations also continued this month for products and services, despite weakening overall confidence.

Watch: Rees-Mogg: IMF's criticism of mini-budget weird

Some 60% of companies said they expect to raise prices in the next 12 months, with an unchanged 4% intending to lower prices. Lloyds highlighted that this was likely to affect manufacturing and businesses relying on imported goods.

Hann-Ju Ho, senior economist at Lloyds, said: “While business confidence has marginally fallen this month, along with a drop in forward looking economic optimism, it is encouraging to see businesses still looking to increase their headcounts.

“However, cost pressures remain evident as businesses raise prices to protect their margins and wage pressure continue to be impactful. Given the recent turbulence in financial markets, it will be interesting to see how this will affect business confidence.”

On a regional level, business confidence was strongest and remained well above the UK average in London, up 16 points to 49%, and the West Midlands, up 8 points to 27%.

The survey revealed some short-term volatility in some parts of the country, including a fall in the North East (10%) and Scotland (5%) from previous strong levels. In contrast, in the East of England (9%) and Wales (5%) confidence increased.

Elsewhere, confidence levels in three areas dipped into negative territory. There were falls in the South East, Northern Ireland, and the South West.

Read more: Number of empty shops in the UK remains higher than pre-COVID levels

However, when looking at the average figures over the past three months, confidence levels in these regions are more positive. For example, the South East three month average was 1%, while the South West was 6%.

Meanwhile, business confidence in the manufacturing sector fell for the fifth month in a row, to 13%, down one percentage point, the lowest confidence level since February 2021.

Confidence in the retail sector declined by six percentage points to 9%, while confidence in the services sector also fell to 16%, both the lowest levels since early 2021.

The construction sector, however, saw a 10 percentage point rise to 20%, although this level still remains weaker than in the first half of the year.

Paul Gordon, managing director for SME and mid corporates at Lloyds, said: “As we head into the winter months and price pressures continue, energy price increases will start to bite and we are seeing continued pressure on pay expectations.

“Businesses need to keep a watchful eye on costs to ensure they are in the best possible position to face any future headwinds. For businesses that may be struggling, we encourage them to reach out to their networks for support.”

Watch: How does inflation affect interest rates?