Business confidence holds up despite rise in market volatility

Overall business confidence remains above the long-term average of 32 per cent, but has decreased by 2 points from 35 per cent in January, with economic optimism remains the same at 31 per cent.

Business confidence – an average of business prospects and economic optimism – in February has slightly decreased from 35 per cent to 33 per cent, according to the latest Business Barometer from Lloyds Bank Commercial Banking. However, this remains above the long-term average of 32 per cent.

Overall confidence in the first two months of the year is higher than in Q4 2017 and is driven by a rise in economic optimism. Levels of economic optimism remain consistent with last month’s results at 31 per cent, having jumped up from 8 per cent in December, which is well above the long term average of 19 per cent.

Firms’ confidence in their own business prospects dipped further this month from 39 per cent to 35 per cent and remains below the long-term average of 44 per cent.

Hann-Ju Ho, senior economist for Lloyds Bank Commercial Banking, comments, ‘Firms continue to remain resilient as is demonstrated by the stable levels in business confidence and the continuation of strong economic optimism. The survey is consistent with slightly stronger growth in GDP in the first quarter of 2018 than was seen in the last quarter of 2017.’

The rise in economic optimism since December – which has been maintained this month – seems to be related, in part, to improved sentiment regarding firm’s assessment of the impact following the UK-EU agreement on the first stage of negotiations in December. Companies are evenly balanced on the impact of Brexit, that contrasts with the final quarter of last year when there was a negative net balance of -11 per cent.

Hiring intentions for the coming year decreased from a seven-month high, but remains positive. There is still little sign that firms expect average wage growth to accelerate over the coming year. Employment expectations for the coming year fell, having risen to a seven-month high in January. The net balance anticipating a rise in staff levels, nevertheless, remained positive, although it decreased by 5 points from 30% to 25 per cent.

Despite expectations of further employment growth for the coming year, there remains little sign that companies foresee a significant pickup in average pay growth. According to our survey, median annual increase in average pay was in the range of 1 per cent to 2 per cent over the past year. The same median increase is anticipated for the next twelve months. Only 15 per cent of firms in our survey expect average pay in the coming year to rise by more than the current rate of consumer price inflation at 3 per cent.

Gareth Oakley, managing director, SME, Commercial Banking, comments, ‘Businesses do seem to be confident in the economic outlook despite current uncertainty, and this is good news. However, there’s no escaping the fact that firms are less upbeat about their own prospects. This lack of optimism might cause some businesses to reflect on investment plans, but it is vital that they do not let anything get in the way of opportunities for future growth.’

London (50 per cent) maintained its high level of business confidence, followed by the East Midlands (42 per cent) and the North East (42 per cent). There was significant improvement in Scotland, which rose from 18 per cent to 35 per cent, slightly above the UK average of 33 per cent. Confidence in the West Midlands, however, fell back from last month’s strong reading of 45 per cent to 30 per cent.

The weakest confidence levels were in the South East (23 per cent), Wales (24 per cent) and Yorkshire and the Humber (27 per cent). Employment expectations by region largely reflect overall confidence, with strongest net balances in London (34 per cent) and the North East (32 per cent). The lowest net balances for expected staff levels were in the West Midlands (12 per cent) and Northern Ireland (18 per cent).

The manufacturing sector reported the highest level of overall confidence at 41 per cent, taking the lead from the construction sector in January whose confidence dropped from 42 per cent to 37 per cent. In other areas, confidence in consumer services (including retail) rose to 31 per cent from 27 per cent, driven by stronger retail sentiment which gapped higher to 37 per cent from 17 per cent.

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