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British businesses most optimistic in over a year but London firms sweat over inflation

Although almost every measure suggested a softer labour market than expected, the downside surprises were small and show a labour market that is still tight in historical terms.
Although almost every measure suggested a softer labour market than expected, the downside surprises were small and show a labour market that is still tight in historical terms.

British business optimism has climbed to its highest level in over a year despite consumers retreating in response to rising prices and the Bank of England’s aggressive interest rate rises, a survey out today reveals.

UK business confidence climbed nine points to 37 per cent in June, taking it up to its highest level since May 2022, according to Lloyds Bank’s business barometer.

Growing optimism among Britain’s services firms – which generate about £2 in every £3 of GDP – pulled the overall reading higher, kicking up to the same level as the UK-wide reading and to the highest level since February 2022.

Hotter weather and signs of a reduction in food and energy costs compelled families to head out and splash the cash, Lloyds said.

Data from the British Retail Consortium earlier this week revealed food prices jumped 14.6 per cent over the last year, the second month in a row the rate has slowed.

The survey is yet another piece of evidence that indicates the UK economy is holding up well amid elevated borrowing costs and sticky inflation.

Interest rates have risen 13 times in a row to a near 15 year high of five per cent. Bank of England officials last week lifted rates by a shock 50 basis points in response to inflation remaining unchanged in May at 8.7 per cent. Core inflation also jumped to more than seven per cent.

Consumers are being squeezed by rising living costs, while steeper rates have made it costlier for businesses to produce goods and services, a dynamic that should bring down inflation by curbing economic activity.

But accelerating wages – up more than seven per cent – and savings built up over the Covid-19 crisis has kept consumer spending on a healthy path, likely boosting business optimism.

Hann-Ju Ho, senior economist Lloyds Bank Commercial Banking, said: “It’s encouraging to see business confidence rebounding following last month’s five-point dip to 28%. Trading prospects and optimism have seen a resurgence this month with overall confidence up in all but two of the twelve regions of the UK, which shows positive prospects across the wider economy.”

London companies’ confidence fell sharply in June, down 10 points to 33 per cent, mainly due to a shortage of skilled candidates and sustained cost pressures.

“Headwinds, particularly around inflationary pressures and the tight labour market, are causing concern,” Becci Wicks, regional director for London at Lloyds Bank Commercial Banking, said.