UK Business Sentiment Reaches an 18-Month Peak Amid Expectations of a Rate Hike Delay

September 8, 2023

Business confidence in the UK reaches an 18-month high even though there is inflation and a cost of living crisis. A Lloyds Bank survey found that economic optimism is recovering after a 50bp interest rate hike failed to materialise. In August 2023, the level of business confidence was just as high as it was before February 2022. Let’s see how this plays out in the regions of the UK.

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Business Confidence on a Regional Level

Regionally, confidence increased in ten of the twelve regions of the UK. London, the South East, and the South West had the largest monthly increase and also the highest confidence levels. However, Yorkshire & the Humber and the East Midlands reported a decline. 

After experiencing a six-point decline in July, confidence has now reached a level of 31 per cent. This figure surpasses the long-term average of 28 per cent.

Business sentiment was majorly driven by a more positive outlook on the wider economy after the BoE (Bank of England) raised the interest rate by 25bp instead of increasing it by 50bp, which some businesses had expected. This was followed by an overall increase in economic optimism.

The Upsurge in Economic Optimism Was Not Consistent

Although economic optimism among those surveyed showed an increase, it was not uniform. Small businesses (turnover between £250k and £3m) and medium-sized businesses (turnover between £5m and £25m) reported a larger rise in optimism. This was 37 per cent for small firms and 39 per cent for medium-sized firms, up 17 points for both types. 

In contrast to that, larger firms (turnover over £25m) reported a level of optimism at 37 per cent, an increase of just six points. This difference reflects the fact that large firms are more exposed to global demand.

The Trading Outlook

The survey also showed that the trading outlook rose for the third consecutive month. 57 per cent of firms are expecting activity to strengthen over the next 12 months, but 11 per cent of companies are expecting weaker results. The result is net balance sheets increasing by four points to 46 per cent and reaching their highest levels since December 2017. 

However, manufacturers and large businesses expressed a more negative outlook on their trading prospects, with the former seeing a decline of 11 points to 35 per cent and large firms falling by 10 points to 48 per cent. 

Pricing Expectations

Additionally, pricing expectations increased, and the net balance was 56 per cent in August. This was due to the desire of 61 per cent of firms to raise their prices. Only 5 per cent of companies were expecting to reduce them. Still, these factors were not equally felt across all industries, and manufacturers are more likely to reduce prices.

Recruitment Intentions and Wages

Hiring intentions of many companies are on the rise, reaching a 15-month-high. Almost 50 per cent of companies plan to increase their employee numbers. Conversely, only 18 per cent of companies plan to reduce their workforce. The net balance rose seven points to 32 per cent, driven by demand for staff in non-manufacturing sectors and smaller companies.

Respondents to the Lloyds survey said their expectations of wage growth had also risen and are now even higher than before the pandemic. 83 per cent of companies expect any increase in the average wage they pay to their workers, and this is the highest figure since 2018. For example, 30 per cent of companies expect a pay rise of 3 per cent, which is also a record high.

UK Business Sentiment Across Sectors

The service sector, alongside construction and retail industries, saw business confidence rise in August. Service sector confidence reached a 22-month high of 42 per cent, while retail confidence rose nine points to 44 per cent, an 18-month-high level. The confidence of construction companies also rose 11 points to 42 per cent.

In contrast, confidence among manufacturing companies fell for the second month in a row, dropping four points to 30 per cent, the lowest level since April 2023. This reflects the general challenges facing the sector in most major economies.

Experts say confidence is now well above the long-term average. It is fuelled by the outlook for peak  interest rates and the direction of travel on inflation. However, there is a clear difference in confidence levels between large and small companies, as the former are still negatively impacted by the overall macroeconomic climate.


The bounce in economic optimism is noteworthy, as businesses feel relieved that interest rates may be reaching their peak. There are also hopes that measures taken to tackle inflation are having an impact. Trading prospects remain stable, and hiring and wage intentions rise, so the macro environment for small businesses and those outside the manufacturing sector is more positive. However, the data suggests that large firms and manufacturers are experiencing some degree of caution, which is likely to reflect the wider global economic environment.

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