UK businesses remain deeply downbeat on outlook despite slight mood lift in May

UK business confidence remains deeply negative, CBI and IoD surveys show, with output expectations well below pre-Iran-war levels and Middle East tensions adding fresh cost pressure on firms.

Summary:
Sources: Confederation of British Industry (CBI), Institute of Directors (IoD), Reuters

• CBI output expectations balance edged up to -24 in May from -25 in April, remaining well below February’s 15-month high of -13 recorded before the Iran war began
• The CBI output balance for the three months to May fell to -31 from -24 in April, though above March’s four-month low of -35
• CBI selling price expectations remained elevated but retreated from April’s three-year high
• The IoD economic confidence index rose to -53 in May from -64 in April, having hit its lowest reading since the series began in 2016 in March
• CBI data drew on 659 responses collected between April 27 and May 13; IoD data covered 615 responses between May 15 and May 27, with almost half of respondents employing fewer than 10 people

British businesses remain firmly pessimistic about the economic outlook, surveys from the Confederation of British Industry and the Institute of Directors showed, with activity squeezed by weak household spending and a reluctance among clients to commit to major expenditure, compounded by escalating cost pressures from the Middle East conflict.

The CBI’s output expectations balance nudged up to -24 in May from -25 in April but remains sharply below the -13 reading recorded in February, before the Iran war began. The output balance for the three months to May deteriorated to -31 from -24, though it stayed above March’s four-month low of -35. Selling price expectations, while easing from April’s three-year high, remain elevated, pointing to continued margin pressure across the survey’s membership of manufacturers, retailers, wholesalers and services firms.

CBI Deputy Chief Economist Alpesh Paleja said activity was being buffeted by weak household spending and clients’ reluctance to commit to large outlays, with Middle East tensions adding a further layer of pressure as firms grew increasingly alert to the risk of additional cost increases.

The IoD’s economic confidence index recovered to -53 in May from -64 in April, pulling back from its lowest reading since the series launched in 2016, recorded in March. The IoD panel skews toward smaller businesses, with nearly half of the 615 respondents employing fewer than ten people, which may partly explain the less extreme negativity relative to the CBI’s larger corporate membership.

Taken together, the surveys describe a UK business community that has absorbed successive shocks, from weak domestic demand to the Iran war and its energy cost implications, and has yet to find a convincing reason for optimism. The marginal improvement in both indices from their recent lows offers limited reassurance while output balances remain deeply in negative territory and the geopolitical backdrop stays unresolved.

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The data offer no comfort for sterling or UK rate expectations. Output expectations languishing at -24, still well below pre-war levels, suggest the Bank of England faces a demand backdrop that argues for easing even as Middle East-driven cost pressures keep the inflation picture complicated. Selling price expectations remaining elevated after April’s three-year high means the stagflationary squeeze on UK businesses has not meaningfully abated. The IoD’s recovery from its all-time series low is marginally constructive at the margin but the index sitting at -53 is not a recovery by any conventional reading.

This article was written by Eamonn Sheridan at investinglive.com.