UK business confidence surged to a 18-month high in August, up 10 points to 41%, despite high inflation and the ongoing cost of living crisis.
According to Lloyds (LLOY.L), it was the highest level of business confidence since February 2022, just before Russia’s invasion of Ukraine. It was also the largest month on month rise since March 2023.
On a regional level, confidence increased across ten of the twelve UK regions and nations, with only Yorkshire & the Humber and the East Midlands reporting lower sentiment.
London, the South East and the South West recorded the biggest monthly increases, as well as having the highest levels of confidence.
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%.
Business sentiment was largely driven by a more upbeat view of the wider economy, after the latest interest rate rise from the Bank of England (BoE) was a hike of 25 basis points and not the 50 point increase some firms had expected. This led to an overall 15-point rise in economic optimism to 36%, Lloyds revealed.
The survey, which was conducted between August 1 and August 15, had most responses taken after the Threadneedle Street's decision on 3 August.
However, the rise in economic optimism was not consistent among those surveyed last month. Small and mid-sized firms expressed a greater rise in optimism in the economy than larger businesses, reflecting bigger companies’ exposure to global demand.
Manufacturers and large firms with turnover above £25m were more pessimistic about their trading prospects. The former fell 11 points to 35% while the latter similarly decreased 10 points to 48%.
But Lloyds added that trading prospects overall rose for the third month in a row, up two points to 57%. Businesses anticipated 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.
Meanwhile, companies hiring intentions rose to a 15-month high, with 50% (up four points), of firms expecting to increase their workforce. In contrast, 18% plan to reduce the number of staff, down three points from the month before.
The August survey also saw some improvement of wage growth expectations, with the proportion of firms expecting higher wage growth remaining elevated compared to pre-pandemic levels.
Firms expecting any increase in the average wage of their employees rose 83% (up three points), the highest since this question began in 2018. Even firms expecting a 3% rise increased to 30% (also up three points), also a record high.
“The bounce in economic optimism this month is the standout point," Hann-Ju Ho, senior economist at Lloyds Bank Commercial Banking, said.
"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.”
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