Overall business confidence in the UK increased by 13 percentage points to 15% in March, according to the Lloyds Bank Business Barometer - the highest level recorded since March 2020 and the start of the pandemic last year. The jump in confidence reflects both progress in the successful deployment of vaccines, a degree of clarity provided by the roadmap out of lockdown for England and plans to ease restrictions in other parts of the UK. 

Survey responses were captured between 1st March and 15th March 2021, with the latest increase in confidence being driven by gains in firms’ trading prospects and their optimism about the wider economy. The net balance of firms reporting stronger optimism about the economy increased by fifteen points to 17%. 

Firms’ trading prospects for the year ahead also climbed by ten points to 12%, with 34% (up five points) anticipating a pick-up in activity and 22% (down five points) preparing for less activity. Overall business confidence is calculated by averaging the views of 1,200 companies on their business prospects and optimism about the UK economy.

Of the businesses surveyed, there appears to be solid support for the speed at which lockdown restrictions are being eased. The majority of firms (57%) agree with the pace of reopening their sector, although there is a significant minority (34%) that prefer a quicker lifting of restrictions. However, 9% of firms said they would benefit from a slower pace. 

Staffing issues improving

Firms’ hiring intentions returned to positive territory for the first time since March 2020, reflecting the improvement in business confidence and aided by the extension of the furlough scheme to the end of September 2021. The net balance for staffing levels in the coming twelve months climbed a further eight points to 4%. Over a quarter of companies (26%) expect to add to their workforce, up two percentage points on last month, while 22% (down six points) are anticipating reductions. 

Within the sectors, the net balance for staffing levels remained slightly negative in manufacturing (-3%), but services edged into positive territory (3%) for the first time since February 2020. Hiring intentions are the highest in construction at 12%, while retail reported a minor uplift to sit at 3%.

In addition, there are further indications that wage freezes may be thawing, but there also seems to be little sign of significant pay rises. A quarter (25%) of firms anticipate a pay freeze in the coming year, down one point from February and two points from January. However, the proportion anticipating pay rises of two percent or more fell marginally to 17% from 18%, and remains around the average level since the start of the pandemic.

Firms’ pricing intentions for the year ahead continue to rise. The net balance of firms expecting to raise prices for their goods and services increased three points to 31%, matching the level a year ago. Some 37% (up one point) of businesses plan to increase their prices, while 6% (down two points) intend to lower them. A quarter of the firms in manufacturing and a fifth in retail have paid higher costs than pre-pandemic levels to secure their supply chain. 

"It’s been a year since the first lockdown and the surge in confidence this month tells us firms are increasingly confident about economic recovery," commented Hann-Ju Ho, senior economist at Lloyds Bank Commercial Banking. "The broadly positive outlook is driven by steady vaccine deployment, the roadmap out of lockdown and the extension of government support measures. It will be interesting to see whether the momentum for stronger business optimism is sustained in the months ahead."

Regional and sector insights

Confidence in Wales turned positive (9%) for the first time in a year, with Scotland also reporting an increase, (up fifteen points to -2%) which, while still in the negative, is the highest level since December 2019. Northern Ireland reported the only dip in confidence, falling by nine points to -6%.

Business confidence increased in eleven of the twelve UK regions and nations. In England, confidence is in positive territory across all regions and strongest in the West Midlands at 27%, the North East at 26%, the North West at 26% and the East Midlands at 20%. Confidence is near the UK average in the South East (16%), Yorkshire & the Humber (12%), the East (12%) and London (12%), and slightly lower in the South West (8%).

In the sectors, manufacturing and retail recorded the highest confidence levels, both at 25%, while services and construction rose to 11% and 12% respectively. 

"We have completed a full circle since lockdown began in March 2020 and it is uplifting to see businesses portraying confidence for the months ahead," said Paul Gordon, managing director for SME and Mid Corporates at Lloyds Bank Commercial Banking. "The regions have reported a tremendous result in confidence, especially England which is positive across the board. In the sectors, the uptick in confidence for manufacturing is driven by strong trading prospects, while in retail, there is an anticipation that pent-up demand will drive consumption when restrictions are lifted. The months ahead will play a pivotal role in charting the course for the UK’s recovery and we remain by the side of businesses as they go along on this journey."

Global demand for UK technology drives recovery

Meanwhile, the number of UK sectors reporting output growth doubled in February, led by a strong performance from technology equipment manufacturers, according to the latest Lloyds Bank UK Recovery Tracker. The Tracker, working with IHS Markit, provides insight into the shape and pace of the UK’s recovery from the disruption caused by COVID-19.

The output of six of the 14 UK sectors monitored by the Tracker rose in February, up from three in January, with technology equipment manufacturers (58.2) recording the strongest growth. A reading above 50 signals output is rising, while a reading below 50 indicates output is contracting.

Accounting for their robust performance, technology equipment manufacturers, which include producers of specialist parts in smart devices, motor vehicles, computers and industrial machinery, cited higher international demand for components. As a result, it was the only UK sector monitored by the Tracker to register a rise in new export orders during February.

Firms within the sector also cited new orders from global technology companies diversifying their supply chains and investing in research and development to improve resilience following COVID-19.

The output growth of food and drink manufacturers (53.7), the second-best performing sector during February, was driven by continuing strong demand from domestic retailers, while the healthcare (52.6) sector benefitted from demand for goods and services that support the UK’s COVID-19 vaccine programme.

Despite the increase in UK sectors registering output growth during February, the stringency of the UK’s lockdown restrictions in comparison to other major economies meant only the technology equipment and food and drink manufacturing sectors were ahead of their global counterparts during February, down from three sectors in January.

However, the gap between world (53.2) and UK PMI output indices (49.6) narrowed in February suggesting many UK firms have become more resilient to the impact of lockdown. 

Public impact of falling exports and supply chain disruption on manufacturers intensifies

The output of automotive (49.1), household products (46.8), metals and mining (45.5) and chemicals (45.4) manufacturers fell in February as businesses reported longer lead times due to record shortages of raw materials and shipping containers. Six of the seven manufacturing sectors monitored by the Tracker recorded a fall in new export orders during February. Chemicals, automotive and food and drink manufacturers all cited reluctance from overseas customers to place new orders amid post-Brexit trade frictions with the European Union.

Meanwhile, the proportion of manufacturers reporting shortages of raw materials, including timber, packaging and polymers, was the highest so far recorded by the Tracker. The number of firms affected by a lack of transport capacity was also nearly 10 times higher than in October 2020. February’s scarcity was linked to shipping container shortages and delays at UK ports.

This supply chain disruption fuelled the fastest rate of manufacturing sector input cost inflation since January 2017, when sterling exchange rate depreciation against the US dollar led to a spike in the price of imported materials to the UK.

"It is encouraging to see a rising number of UK sectors register output growth in February, despite the challenging lockdown conditions," said Jeavon Lolay, head of Economics and Market Insight at Lloyds Bank Commercial Banking. "It highlights both strong global demand and how well UK businesses and households have adapted to tough restrictions on mobility. It suggests that a modest rise in monthly UK GDP is possible in February, after the smaller-than-expected decline in January. However, February’s data also shows that the UK’s economic recovery from COVID-19 is tied to more than just the stringency of lockdown restrictions, which disproportionately affect consumer-facing services sectors. Manufacturers are facing into a more challenging export environment and the global supply chain disruption currently holding many firms back looks set to continue."