Business confidence in UK at four-year high but staff shortages a concern

UK business confidence has hit a four-year high, thanks to growing optimism about the post-Covid recovery, but companies highlighted concerns about staff shortages, which could push up pay in the coming months.

The vaccine rollout, removal of lockdown restrictions and changes to self-isolation rules all contributed to greater optimism among firms in August, according to the latest snapshot from Lloyds Bank.

The rebound in sentiment in August was widespread across the UK, with nine of 12 regions and nations reporting improving confidence, particularly in the north-west. It comes as more businesses prepare to welcome their staff back to worksites and offices in September after a relatively successful Covid vaccine rollout across the country. Growth in confidence was sharpest in the services sector, as businesses including bars, restaurants and hotels have benefited from a return of customers.

Hann-Ju Ho, a senior economist at Lloyds’ business banking arm, said the figures told “a positive story about the country’s economic recovery … Staff shortages remain a challenge but as the economy moves back towards pre-pandemic levels we can be optimistic that the momentum for business confidence and economic optimism can be sustained in the months ahead.”

The bank’s business barometer showed overall confidence rose by six points to 36% in August, marking its highest level since April 2017 and offsetting a slight dip in July. Optimism over the state of the economy also rose for the first time in three months, up six points to 38%.

The survey also tracked a seven-point rise in the proportion of firms expecting stronger business activity in the year ahead to 48%.

The figures follow a rebound in UK growth in the second quarter, when GDP expanded by 4.8% as lockdown measures introduced to fight the Covid-19 pandemic were relaxed. However, the economy was still 4.4% smaller than in the final three months of 2019.

The Lloyds survey of 1,200 companies in August found firms were uncertain about extended labour shortages, with the poll also showing that only 18% expect to increase headcount, in line with last month’s reading.

A growing number of companies have started increasing pay to try to lure staff, particularly lorry drivers, after a drop in available workers put a squeeze on UK supply chains and left some retailers and restaurants – including McDonald’s, Nando’s and KFC – struggling to maintain stock and serve customers. The labour crunch has been blamed on Covid as well as post-Brexit immigration policies that have made it harder for foreign workers to secure visas in the UK.

Lloyds’ barometer showed a third of businesses expect pay to be pushed up by at least 2% over the next 12 months. About 17% of firms are anticipating wage growth of more than 3%, which is a record level since the question was first asked in the survey in 2018.

The bulk of UK regions logged increases in confidence, with the north-west soaring by 26 points to 64% in August, and the east of England rising 14 points to 39%. Both recorded their highest confidence levels since the poll was expanded in 2018. Northern Ireland, meanwhile, swung to positive territory after rising significantly from -6% in July to 18% in August.

The greatest monthly increase in confidence came in the services sector, rising by eight points to 36%, thanks to the easing of Covid restrictions. That is the highest level since January 2018. Confidence across construction and manufacturing also picked up, each rising seven points to 40%, despite the supply chain disruptions. Retail struggled to make comparable gains, posting a two-point rise to 34%.

Meanwhile, figures published on Monday showed business sentiment across the eurozone dipped in August, which some analysts attributed to fears over the Delta variant. “With expectations of an autumn resurgence of the virus, stricter corona measures are an important downside risk to the outlook,” said Bert Colijn, an ING senior economist.

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