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UK business confidence sinks to record low, worse than pandemic levels

UK business confidence sinks to record low, worse than pandemic levels

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British business leaders have less confidence in the UK’s economy than during the COVID-19 pandemic lockdowns. A new IoD survey shows that confidence in the government’s ability to foster growth is at a multi-decade low.

The survey found that sentiment about the UK economy dropped to minus 72 in July. That’s a steep drop from negative 53 in June. The reading was also slightly higher, excluding the COVID-19 lockdown in April 2020, at minus 69.

The IoD has been measuring economic confidence since 2016. July’s number is now the worst on record. Business figures from across the UK are voicing bemusement. Most say they do not think the government has a clear or effective plan for returning to growth.

Almost 85% of the 900 business leaders surveyed said they lack confidence in the government to jump-start the economy. More than two-thirds said they believed the government’s policies on the economy have been “very unsuccessful” to date.

The steep plunge in confidence is about more than just short-term uncertainty. Many executives see structural challenges pulling the economy lower.

Businesses extend confidence to new governments

This record low came just weeks after Prime Minister Keir Starmer and his Labour government came to serve in early July.

Labour had promised investment in growth, better public services, and pull factors to draw investment in. But more costs and little change are what business leaders say they are seeing so far.

The new government raised corporate taxes to finance its social and infrastructure programs. However, executives said the tax hikes added extra pressure on struggling businesses.

Anna Leach, head of economic analysis at the Institute of Directors, said they were now living with the economic scars of those tax increases. She added that many people were frustrated by how quickly the government had raised the cost of doing business, while being slow to improve the overall business environment.

In short, the private sector thinks it is paying more and getting nothing. The new government’s initial steps to shore up investor sentiment are also short. Many had anticipated a bounce in optimism after Labour won the election. Rather, confidence is sliding even further.

Hopes among businesses that trade, planning reforms, and regulation would become clearer had also been dashed.

Businesses cut back on growth plans

The crash in overall confidence is now also seeping into daily business activity. The IoD’s separate index, measuring confidence in company-level performance, also fell sharply — from +3 in June to -9 in July. That is the second-lowest reading since the data was introduced almost a decade ago.

Investment intentions have slumped. Firms are holding off on expansion, trimming budgets, and putting plans to take on more staff on hold.

Revenue and headcount growth expectations are also lower. In reality, many businesses now anticipate having to pay more wages and absorb more operating costs in the months ahead.

This follows the most recent S&P Global Purchasing Managers’ Index (PMI), which found growth in private sector activity slowed markedly in July.

Growth had been rolling in strongly during the first half of the year. But momentum is now flagging. More companies are cutting jobs, reducing hiring, and freezing new recruitment. Labour’s determination to hike up the payroll tax has not helped. The latter cites global uncertainty due to various issues – trade tensions, geopolitical events, supply chain indecision, and the like – as reasons to stay cautious.

Exporters are especially concerned. The IoD index of plans to export has turned negative for the first time since 2023. It’s a blow to Labour’s trade plans, which also involve making another effort to negotiate a deal with the United States.

A relatively bright spot in the distance of some optimistic diplomacy does little to assuage UK business fears of paralysis at home and the increasing global uncertainty that now makes even the risk-sensitive export sector more pessimistic than ever.

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British government bond turmoil rekindles truss fears amid fiscal worries

British government bond turmoil rekindles truss fears amid fiscal worries

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British government bonds plunged on Wednesday after the Labour government scrapped planned welfare cuts.

The U-turn, which ditched billions of pounds worth of savings to consolidate public finances, sent shockwaves through the markets and revived fears of the 2022 bond market crash that aborted Liz Truss’ brief premiership.

Chancellor Rachel Reeves fought back the tears during Prime Minister’s Questions today, as she was present alongside Prime Minister Keir Starmer. The appearance, where she appeared tired and tearful, prompted speculation that her days in the Treasury were numbered. While Downing Street later attributed her distress to a “personal matter” and emphasized that Starmer continued to have full confidence in his chancellor, markets were unconvinced.

The yield on the UK 10-year gilt shot up to 4.681% at one stage before Christmas, the biggest intra-day surge since the Truss era mania event. It subsequently moderated to 4.60%, but the die was cast. Yields on 30-year gilts climbed 17 basis points as longer-term fears about fiscal credibility reared their head.

Reeves under fire amid doubts over Labour’s fiscal plan

Chancellor Reeves is in the limelight again over the political fallout from the welfare U-turn. Her fiscal rules are in danger now of being trashed. The benefit cuts that have since been dropped were supposed to buttress those rules by saving the Treasury billions. It has made Britain’s already tight fiscal space even more constrained.

Her leadership is now in question, including from within the Labour Party. There have also been reports that some Labour MPs feel the first raft of cuts was cruel and targeted the most vulnerable. But Reeves had pressured them to help meet her spending goals, a reminder of the tightrope she walks between compassion and credibility.

Starmer’s refusal to say outright that he backs Reeves in Prime Minister’s Questions also added to the speculation. His press office later reiterated their unity, but traders were already selling the news. The pound was down by almost 1% against the dollar and at a two-month low against the euro, which rose 0.8%. The domestically focused FTSE 250 index, which is frequently seen as a barometer of confidence in the domestic economy, fell 1.3%, lagging behind broader European indexes.

“There’s a real fear that if Reeves goes, her replacement could throw out the current fiscal framework,” said Craig Inches, head of rates and cash at Royal London Asset Management. “That would open the door to unbridled borrowing and bring additional instability.”

Even if Reeves stays, the episode has already marred the Labour government’s credibility just weeks in. For much of the financial world, it’s an uneasy beginning.

Global debt fears put pressure on Britain

The UK’s challenges are against a wider background of deepening global concern about government deficits. Bond investors from the United States to Japan are growing wary of soaring government debt. But Britain appears particularly vulnerable.

Unlike other major economies, the UK has little fiscal space, its growth is tepid, and its monetary conditions remain tight. The Bank of England is keeping rates higher to fight inflation, which makes borrowing more expensive for the government and shrinks the fiscal space.

Simon Blundell, head of European fixed income at BlackRock, said the developments had added another layer of uncertainty to an already delicate situation. He noted that while it wasn’t a repeat of 2022, investors remembered what had happened and were quick to react.

While BlackRock has maintained a generally positive stance toward gilts, sentiment could change rapidly if the government fails to send clear, consistent signals about its fiscal intent, according to Blundel.

He added that if spending cuts are politically unworkable and self-imposed rules limit borrowing, the only option left is higher taxes.

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