Lloyds Banking : Business confidence downward trend intensifies but retail sector shows gain

Business confidence fell by five points to 10% in November, the weakest since February 2021, according to the latest Lloyds Bank Business Barometer.

While business confidence sits below the long-term average of 28%, it remains above the lowest level seen in 2020 during the first COVID-19 wave (-33% in May 2020). The survey was conducted between 1 and 15 November, ahead of the Autumn Statement by the Chancellor.

For the sixth month in a row, overall economic optimism declined, with the net balance falling into negative figures for the first time since January 2021. Of businesses surveyed, 37% (down from 41%) said they were more optimistic about the economy with 40% (up from 39%) stating a more pessimistic view, resulting in a net balance of -3% (down from 2% in October).

The number of firms expecting stronger trading prospects also fell, from 46% in October to 43% in November, while an unchanged 19% anticipate weaker prospects.

Businesses' hiring intentions decreased to an 18-month low with over a third (38%, down four points) reporting higher expected staffing levels and just under a quarter (24%, up three points) anticipating a lower headcount. These changes show a net decline of seven points to 14%, signalling potential slower employment growth ahead for the economy.

Wage expectations eased marginally this month, with businesses planning to increase salaries by 3% or more dipping by one point to 25%. However, the fall in business confidence has yet to impact pricing expectations. In November, 60% (unchanged from October) said they would be targeting higher prices for their goods and services, reflecting the pressures to pass on the higher costs.

Hann-Ju Ho, Senior Economist Lloyds Bank Commercial Banking, said: "Given the recent political and economic landscape, it comes as little surprise that economic optimism and business confidence have fallen this month. Pay growth expectations remain high by historical standards, which could signal ongoing difficulties ahead for businesses to fill vacancies. Looking ahead, it will be interesting to see if the clearer policy picture provided by the Autumn Statement will lead to business confidence moving in a more positive direction as we go into 2023."

Regional and sector insights

Confidence in Scotland surged this month to 24% (up 19 points), to become the most confident among the UK's regions and nations for the first time since mid-2021. There were also significant increases in confidence in Northern Ireland (19%, up 30 points), Wales (17%, up 11 points) and the East of England (16%, up seven points).

Business confidence fell significantly in London (22%, down 27 points) and the North West (9%, down 19 points) this month. London last month was the most upbeat part of the UK although this month it remains above the national average.

Business confidence in retail increased to 15% (up from 9%), perhaps reflecting a renewed confidence in trading prospects ahead of the festive season. However, business confidence in the manufacturing sector fell for the sixth month in a row, to 4%, down nine points, the lowest confidence level since early 2021.

The construction sector held gains made in October, remaining unchanged at 20%, although this level still remains weaker than in the first half of the year.

Paul Gordon, Managing Director for SME and Mid Corporates, Lloyds Bank Business & Commercial Banking, said: "The fall in confidence shows just how tough it is for businesses right now. Pressures from rising costs continue and businesses are starting to feel the burden of higher energy bills. However, the tentative easing of wage expectations should provide some solace although we know the labour market is still tight.

"We would encourage businesses to keep a keen eye on their costs and cash flow as we head into the festive period. If any businesses are struggling, we would encourage them to reach out for support. At Lloyds Bank we remain by the side of businesses to help navigate these challenging times."

Chart 1: Business confidence falls further below the long-term average