Confidence edges to two-year high since Brexit vote but fails to lift business investment plans

UK businesses are not increasing their recruitment and investment plans since the start of the year, despite confidence reaching a two-year high since the EU Referendum vote, according to the latest Business in Britain report from Lloyds Bank.

The confidence index – an average of respondents’ expected sales, orders and profits over the next six months – edged slightly higher to 25 per cent compared with 23 per cent in January 2018. It remains above the long term average as businesses are more confident than at any point since the EU Referendum vote in June 2016.

The Business in Britain report, now in its 26th year, gathers the views of over 1,500 UK companies, predominantly small to medium sized businesses, and tracks a range of performance and confidence measures, weighing up the percentage of firms that are positive in outlook against those that are negative.

Investment and recruitment muted but difficulty remains in finding the right skills
The net balance of firms looking to grow investment in the next six months fell marginally by one point to 12 per cent, while a net 8 per cent of firms anticipate an increase in their headcount, compared with 9 per cent in January.

The share of firms who continue to report difficulties in hiring skilled labour increased three points to 49 per cent and remains historically high with London (65 per cent) and the West Midlands (57 per cent) finding it the hardest to recruit.

Brexit uncertainty and weaker UK demand top firms’ concerns
Brexit uncertainty remains the single greatest risk to firms in the next six months, cited by 21 per cent of firms, closely followed by weaker UK demand at 16 per cent.

Over a third (36 per cent) of businesses expect a negative impact on their business if no trade agreement is reached with the EU. A fifth (20 per cent) expect a positive impact while almost half (44 per cent) do not expect any impact or didn’t know.

Sharon Geoghegan, Managing Director, SME Banking, Lloyds Banking Group said: “Despite concerns on the wider economy, businesses are still relatively upbeat as our latest report shows business confidence hitting a two-year high since the Brexit vote. England’s better than expected performance in the World Cup will also boost the nation’s feel-good factor.

“As we look ahead, the external environment remains mixed as Brexit uncertainty and weaker UK demand are businesses’ biggest concerns for the next six months. Despite those risks and rising global trade tensions, business investment and hiring intentions remain at similar levels to the start of the year.”

Export expectations remain positive
The outlook for exports improved. A net 27 per cent of exporters anticipate stronger exports in the next six months, up from 24 per cent in January. Companies expect the strongest demand to come from the US, Europe and the Middle East, while prospects are expected to be the weakest in Russia and South America.

Construction sector sees big rise in confidence
Business confidence was the highest in the transport & communications and construction sectors with the construction sector registering a significant rise compared with January’s survey, rising 12 points to 26 per cent. In contrast, confidence was the lowest in retail & wholesale and hospitality & leisure and fell from January’s report.

Confidence rises in most regions but strongest in the South
Most regions saw a rise in business confidence and was the strongest in London (31 per cent) and the South East (30 per cent). There were significant falls in the East Midlands and the North West, dropping ten and 12 points respectively to 14 and 19 per cent where sentiment levels were the lowest in the UK. Confidence also fell in the North East from the last survey’s highs but remained the same as the UK average.

Business sentiment also improved slightly, but remained below the UK average, in Wales, Northern Ireland and Scotland.

Hann-Ju Ho, Senior Economist, Lloyds Bank Commercial Banking said: “Encouragingly, UK exporters expect to increase their overseas activity in the next six months, with the strongest demand anticipated to be from the US, Europe and the Middle East. External demand is being supported by the past depreciation of the pound and robust global demand, notwithstanding increased trade tensions.

“The share of firms finding it difficult to hire the right skills continues with London and the West Midlands finding it the hardest to recruit. This, along with strong global demand, is encouraging firms to maintain their investment levels. Overall, the resilient survey readings provide reassurance around the case for a further rise in interest rates, potentially as soon as the next meeting in August.”