Business confidence inches into positive territory, driven by hopes for economic revival

The latest Lloyds Bank Business Barometer shows:

• Overall business confidence increased by nine percentage points to 2%, the first positive net balance since the start of the pandemic and the highest level recorded since March 2020.
• Although confidence remains below pre-Covid levels, the improvement in sentiment was led by a rise in firms’ own trading prospects for the year ahead and their optimism about the economy.
• Confidence increased across all UK regions and nations, with North West, East Midlands and London businesses the most positive.
• In the four broad industry sectors, confidence is in positive territory for the first time since March 2020, with manufacturing and construction up fourteen and eight percentage points respectively.

Overall business confidence increased by nine percentage points to 2% in February, according to the Lloyds Bank Business Barometer (chart 1), the first return to positive territory since March 2020 when the very first national lockdown began.

Survey responses were captured between 1 February and 15  February 2021, which preceded the government announcement (22 February) on its roadmap out of lockdown and during which time the UK remained under national lockdown restrictions. Although confidence remains below pre-Covid-levels (chart 2), the improvement in sentiment reflects the anticipation of a gradual reopening of the economy and continued successful vaccine rollout as well as improvements in firms’ trading prospects and their optimism about the wider economy.

A close reading indicates that the net balance for trading prospects for the year ahead rose by seven points to 2%, with 29% (up five points) of businesses planning for a pickup in activity and 27% (down two points) anticipating less business. Optimism about the economy increased month-on-month by eleven points 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.

While firms’ hiring intentions remained in negative territory this month, it was the least negative since last March (Chart 3). The net balance for employment in the coming year increased eight points to ‑4%, with 24% (up three points) expecting to increase headcount and 28% (down five points) anticipating net reductions.

There were some indications that wage freezes may be thawing (Chart 4), with just over a quarter (26%) of firms expecting no pay increase in the coming year, down two points since January. In parallel, there appears to be little indication of significant wage rises, with the proportion of firms expecting pay increases of 2% or more at 18%, close to the average since the start of the pandemic.

 

Chart 1: Business confidence recovering from last spring’s lows		Chart 2: Firms adapt to restrictions and react to the vaccine news and rollout
Source: Lloyds Bank Business Barometer (February 2021), BVA BDRC		Source: Lloyds Bank Business Barometer (February 2021), BVA BDRC (Pre-Covid=2019, 1st wave=Apr-Jun, 2nd wave=Sep-Nov, 3rd wave=Dec-Feb 2021)

Firms’ intentions to increase prices for their goods and services in the next year are the highest for nearly a year. The net balance increased by three points to 28%, with 36% (up one point), expecting to raise their prices and 8% (down two points) anticipating price reductions.

Hann-Ju Ho, senior economist, Lloyds Bank Commercial Banking, said: “The uplift in business confidence and its entry into positive territory after nearly a year suggests that firms are cautiously pinning their hopes on economic revival in the future and the continued success of the vaccine rollout. In the coming weeks, announcements in the Budget and prospects of an easing of lockdown restrictions will hopefully help to bolster the recovery in business confidence as the economy starts to reopen.”

 

Chart 3: Hiring intentions gradually improving		Chart 4: Pay freeze thawing, but little sign of significant wage increases
Source: Lloyds Bank Business Barometer (February 2021), BVA BDRC		Source: Lloyds Bank Business Barometer (February 2021), BVA BDRC

 REGIONAL AND SECTOR INSIGHTS

Business confidence increased in all twelve UK regions and nations (Chart 5). In England, firms in the North West (13%), the East Midlands (10%) and London (7%) were the most confident this month. Yorkshire & the Humber (4%), the South East (4%) and the West Midlands (3%) were also above the UK average of 2%. Confidence also improved in the North East (1%), the South West (‑6%) and the East of England (‑8%).

Northern Ireland saw a big rise to 8% (from -30%), while confidence in Wales rose significantly to ‑5% (from -20%) after a weak start to the year. Scotland increased to ‑17% (from -32%) which, despite being lower than the UK average, is the second highest since the start of the pandemic.

Confidence increased across all four broad industry sectors to the highest levels since March 2020 (chart 6). After a soft start to the year, manufacturing jumped by fourteen points to 5%, while construction rose eight points to 7%. Confidence in retail extended nine points to 3%, while services advanced by ten points to 1%, led by broad-based improvements in the subsectors.

Paul Gordon, managing director for SME and Mid Corporates, Lloyds Bank Commercial Banking, said: “It has been very promising to see an increase in optimism across all regions and nations in February, led by London, the North West and East Midlands. In the sectors, the story has been positive too, with the four broad industries recording the highest levels of confidence since March 2020.  What this shows us is that the majority of the UK is gearing up for an economic revival, with the steady vaccine rollout fuelling optimism.”

Chart 5: Confidence climbed in all UK regions and nations		Chart 6: Confidence across sectors has risen to the highest levels since the pandemic began
Source: Lloyds Bank Business Barometer (February 2021), BVA BDRC		Source: Lloyds Bank Business Barometer (February 2021), BVA BDRC (Pre-Covid=2019, 1st wave=Apr-Jun, 2nd wave=Sep-Nov, 3rd wave=Dec-Feb 2021)

26/02/2021