Yahoo Finance UK business confidence slumps as inflation and Ukraine war bites
Business confidence in the UK took another hit in March as inflation and the conflict in Ukraine increased economic uncertainty.
The latest business barometer from Lloyds Bank (LLOY.L) revealed that confidence fell by 11 points to 33%.
An 11-point fall in both trading prospects, down to 34% from 45%, and economic optimism which slumped to 32% from 43%, drove the drop in confidence. Both fell to their lowest levels since the summer of 2021.
However, the decline this month was lower than the drops in confidence in the first two months of the pandemic, when it fell by 17 points and 38 points. The reading also remains above the long-term average of 28%.
Just three of the UK’s 12 regions recorded increases in confidence, with London increasing by 13 points to 60%, Yorkshire and the Humber up six points to 57%, and the North West rising one point to 45%.
There were significant drops in Wales, and the South West, while Northern Ireland reversed its surge over recent months, falling 36 points to 18%.
Read more: Cost of living crisis: UK shop prices rise at highest rate since 2011
On a sectoral level, manufacturing was down 19 points to 35%, and the retail industry fell 19 points to 28%, both significant drops in confidence. Meanwhile, services dropped by six points (32%) while construction dropped eight points to 43%, but remained higher than at the start of the year.
The data also showed that more than half of British firms (55%) said they expect to increase prices in response to soaring inflation, which hit 6.2% in the year to February, its highest level since March 1992.
This was above January’s previous 30-year high of 5.5%. On a monthly basis, CPI inflation was 0.8%, exceeding expectations for a 0.6% rise, and the biggest increase since 2009.
The biggest contribution came from soaring energy, fuel and food prices, while transport saw the highest rate for the second consecutive month.
A record 55% of companies now expect to charge higher prices, while only 4% anticipate lower prices. This creates a new high net balance of 51% (up three points from 48%).
Watch: How does inflation affect interest rates?
Lloyds added that employment hiring expectations continued to show strong demand for staff since the end of the furlough scheme, despite a seven-point fall to 31%.
Nearly half of firms (49%), down from 52%, expect to increase their headcount in the next 12 months, while 18% expect to reduce. This was up from 14%.
It came as a record 49% expect average pay growth of at least 2% in the next 12 months, an increase of 32% points since March 2021.
This comprised of nearly a quarter (24%) of firms anticipating an average pay rise of 2% to 3%, while 11% expect 3% to 4% wage growth and 14% anticipate over 4% pay growth.
Read more: UK wage growth lags behind inflation as cost of living squeeze continues
A fifth (19%) of businesses with annual turnover above £100 million expect to increase their average pay by more than 5%, compared with 6% of all firms.
“March’s data shows UK businesses are facing significant challenges from the impact of Russia’s invasion of Ukraine in increasing economic uncertainty and ongoing inflationary pressures. Following encouraging improvements at the start of the year, March’s fall in confidence is therefore disappointing, but not surprising,” Hann-Ju Ho, senior economist at Lloyds Bank Commercial Banking, said.
“There are positives with the fact that confidence remains above the long-term average and it appears for now that growth will moderate. But it is difficult to gauge what the full impact will be and therefore businesses have become more cautious.”
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