Business confidence falls for first time in three months

The latest Lloyds Bank Business Barometer shows:

• Overall business confidence[1] fell by four points to 10% in May; within this economic optimism was broadly steady.
• Firms in manufacturing posted a rise in confidence for the second consecutive month, although confidence fell in other sectors.
• Confidence was down in eight of the UK’s 12 regions, although Yorkshire and the Humber bucked the trend.

Overall business confidence in May fell for the first time in three months, dipping four points to 10% according to the latest Lloyds Bank Commercial Banking Business Barometer. This decline follows a four point rise in April to 14% and brings the figures in line with confidence levels in March 2019 (chart 1).   

The net balance of firms reporting stronger trading prospects fell seven points to 17% this month, while economic confidence was broadly steady, edging down one point to 2%. Overall business confidence is calculated by averaging the views of 1,200 companies on their business prospects and optimism about the UK economy. 

Business confidence levels remain below the long-term average[2] of 24% (chart 2), averaging 11% so far in 2019, compared with 28% in 2018. Firms’ assessment of the expected impact the UK leaving the EU will have on their trading prospects reached a new low at -21% (chart 3). While 19% believe leaving the EU will have a positive impact, 40% say it will have a negative impact.

In May, an unchanged one-third (33%) of firms said they expect to increase their headcount in the year ahead, while 21% (up from 19% last month) predicted it would shrink. The proportion of firms reporting that they expect average pay growth of 2% or more in the next twelve months fell to 25%, the lowest since the question was first asked in January 2018.

Hann-Ju Ho, Senior Economist, Lloyds Bank Commercial Banking, said:

“Overall business confidence continues to sit below the long-term average. A slight dip in confidence this month appears largely to reflect companies’ assessment of their own trading prospects for the coming year, and the anticipated impact of the UK leaving the EU. It’s encouraging to note that while we are seeing uncertainty impacting business confidence overall, optimism regarding the wider economy remains broadly steady.”

Confidence down in eight of twelve regions

Overall business confidence fell in eight out of the 12 regions in May (chart 4). The biggest decline was in the North East (down 17 points to ‑5%), followed by London (down 9 points to 10%), the South West and Scotland (both down 9 points to 0%). Businesses in the East of England were the least confident, with an overall confidence of -6%.

Yorkshire and the Humber was the most confident region in May, rising five points to 23%. The West Midlands was the second most confident UK region (21%), followed by the East Midlands and Wales (both 19%).

Rise in manufacturing confidence

Overall confidence rose among manufacturing businesses for the second consecutive month, up 5 points to a four-month high of 21%. The sector was the most confident in both trading prospects and economic optimism.

The services sector continued to report the weakest overall confidence (down 5 points to 7%), reflecting firms’ more negative economic optimism and the expected impact of the UK leaving the EU. Confidence also fell in construction (down 3 points to 12%) and retail (down 5 points to 11%).

Paul Gordon, Managing Director for SME and Mid Corporates, Lloyds Bank Commercial Banking, said:

“Although there has been a fall in business confidence this month – in part due to the political climate at home and in arguably larger part due to the escalating US-China trade tensions – there continues to be improvements in confidence in some areas. The manufacturing sector and a number of the regions deliver stronger readings this month, suggesting the UK’s continued business resilience.”

Notes to editors:

¹ Overall business confidence is a measure of responses from surveyed companies, which is calculated as an average based on their views on business prospects and optimism on the UK economy.

² The long-term average for business confidence is calculated as the average since the survey began in 2002, taking into account the expansion of the survey’s sample size at the start of 2018 when firms with turnover below £1m were included for the first time.

• The Business Barometer results provide early signals about UK economic trends. The survey started in January 2002 and research is carried out monthly on behalf of Lloyds Bank by BDRC Continental.
• This survey was conducted with 1,200 companies between 1^st and the 16^th May 2019 from all sectors and regions of the UK. Prior to January 2018, the fieldwork was based on 200-300 companies.
• The results are reweighted to match proportions by size, sector and region of the total business population, as published by the Department for Business, Energy and Industrial Strategy and the Office for National Statistics.
• For further summaries and infographics, see #BusinessBarometer or follow @LloydsBankNews on Twitter.