UK business confidence is rising but it's not party time just yet

Times

04-06-2025

Something curious and rather unexpected is happening. Two prominent surveys of UK business confidence, published in recent days, show that optimism is rising strongly.
At a time when firms have just been clobbered with a big increase in national insurance (NI), that is something of a surprise. Yet, sure enough, Lloyds Bank's business barometer showed an 11-point rise in May to its highest level for nine months, with optimism about the economy up by 16 points.
Nine of the UK's 12 regions and nations reported stronger business confidence, the survey showed, with the biggest rises being in Northern Ireland, the East Midlands and the South-West, and significant gains also in Wales and Yorkshire & the Humber.
The Institute of Directors (IoD) also revealed a strong rise in confidence for last month, with its main measure rising by 16 points, also to the highest since August last year. Firms are concerned about higher employment taxes but slightly less than they were, and worries about the economic outlook have abated to an extent.
Investment intentions and export prospects both showed an improvement. It is not yet party time, and confidence remains below where it was at the time of last summer's general election. But as Anna Leach, chief economist at the IoD, puts it: 'It's good to see a recovery in business confidence under way, with our headline measure moving up three months in a row.'
At Lloyds Commercial Banking, senior economist Hann-Ju Ho said: 'The rebound in business confidence suggests that firms might be in a stronger position for the next quarter. The rise in confidence is driven by a sharp increase in economic optimism, reflecting the recovery in financial markets amid the easing of global trade tensions.'
Firms have had plenty to worry about in recent months, including those higher taxes but also, most notably, the threat of a global trade war, triggered by America's lurch towards the most protectionist policies since the 1930s.
President Trump's 'liberation day' tariffs, unveiled on April 2, confirmed the worst fears of many businesses. The recovery in confidence in the past few weeks is thus mainly a reflection of the fact that business people decided those worst fears were perhaps not justified. Not only did Trump announce a 90-day pause in most of the tariffs, he or his negotiators reached an accommodation with China on lower tariff rates, for now at least. US tariffs on imports from China were reduced from 145 to 30 per cent. Not only that, the British government signed a trade deal with America, as well as a 'reset' deal with the European Union and a new deal with India. Things, it seemed, were not so bleak after all and a descent into the abyss had been avoided.
Except, of course, we are dealing with a US president whose love for tariffs appears to know no bounds, notwithstanding the fact that they will badly damage the US economy, hit American consumers hard and are the biggest current threat to the global economy.
The perception that Trump will always draw back when the extent of the damage becomes apparent or when he is forced into it by the treasury market — the market for US government bonds — has not just buoyed UK business confidence. It helps explain why America's S&P 500 equity market index is up nearly 20 per cent from its lows in the wake of the April 2 tariff announcement. On Wall Street, as you may know, they have an acronym for this, Taco (Trump always chickens out) and I had to admire the reporter who put this to him during an Oval Office press conference, prompting a long, hurt and somewhat confused response.
We know, however, that Trump can do and say some stupid things without provocation and the risk is that the 'Taco' label, now he knows about it, is like poking a hornets' nest. Within days, in a speech in Pittsburgh, he announced a doubling of steel and aluminium tariffs to 50 per cent. A defeat for his 'state of emergency' general tariffs in the US Court of International Trade appears only to have emboldened him.
The tariff danger is not yet over. It is not, of course, the only danger. With the UK government's public expenditure review looming, businesses are only too aware that all the pressure is for higher spending, not lower taxes. Curbing winter fuel payments was never going to save much money, so a U-turn on that is more of a political than an economic issue. Taken together with pressure to scrap the two-child benefit cap and reverse cuts in disability benefits, however, it starts to add up to real money.
An even bigger issue is defence spending, and the hole in this week's strongly worded strategic defence review — the question of where the extra cash is coming from to pay for Britain's enhanced needs — is big enough to be seen from outer space. Some firms will benefit from higher defence spending, and the government has emphasised the potential economic benefits, but others will fear that they have to pick up the bill.
At a time when the public finances are already under pressure, even with the big increase in employer NI announced last year and implemented in April, businesses have reason to be worried. They can take comfort from the prime minister's comment this week that you can't tax your way to economic growth and, to a lesser extent, Rachel Reeves's assurances that she would not be repeating last year's big tax-raising budget this autumn.
Such assurances only go so far, however, particularly when taken alongside the chancellor's apparent determination to avoid direct tax increases on 'working people'. Businesses will be hoping that history does not repeat itself and that any action to fix the public finances can be delayed. Who knows, maybe by then the 'growth fairy' will have come along and waved her magic wand. But when it comes to tax, firms have learnt not to rely on fairy tales.