Surveys show that budgetary constraints dampen business confidence

According to three surveys of business activity by the Confederation of British Industry (CBI), the Lloyds Business Barometer, and the Institute of Directors, the Budget has caused a fall in confidence.

According to the CBI Growth Indicator’s latest report, firms expect that activity will fall by 10% over the next three months up to February 2025. This is the first time in this year when expectations of growth are negative.

The services sector is expected to see a 13% decline in business volumes, with a 7% decline in professional and business services and a 33% decline in consumer services, the lowest expectations in two years. Distribution sales will also fall by 20 percent, but manufacturers expect to increase their output by 9 percent.

In the third quarter of 2011, the private sector’s activity dropped again (-13%). This was a greater decline than the one seen in the previous three-month period (-4%)

Alpesh Paleja is the interim deputy chief CBI economist. He said, “As we move into 2025, expectations for growth are deteriorating. Our surveys indicate that the expected activity had already weakened heading into the Budget in October, and the announcements of the chancellor have forced businesses to make even tougher choices.

The news that companies are planning to cut headcounts is concerning, as hiring intentions have been at their lowest since the end of the Covid-19 epidemic. This could be a sign that the increase in labour costs due to the upcoming increase in employer NICs and the increasing of the national living wages is already having an impact.

Lloyds Business Barometer

The latest Lloyds Business Barometer, however, also revealed that the business confidence index fell by three points in November 2024. Its index is still significantly above the long-term median of 29%.

More than half (52%) of the 1,200 respondents to Lloyds’ survey were more optimistic than they were three months earlier, but 26% said that they felt less positive. This is up from just 20% in October.

However, businesses were more optimistic about their own trading prospects. Only 8% of businesses said they expect less activity in the next year while 63% predict more.

Although hiring intentions decreased for the third consecutive month, 52% respondents planned to increase their workforce size, which is three times more than the number of companies expecting to reduce their workforce (17%).

Hann-Ju Hu, senior economist at Lloyds Commercial Banking said that the overall confidence index fell 3 points in November for the third consecutive month. It is the lowest since June but is still higher than the long-term average of the survey, which is positive in the longer term.

These results show that although firms are mixed about the economy they still see their business as well-positioned to deal with any challenges. Although hiring intentions have moderated this month, they haven’t declined much, which is also good news.

Institute of Directors

The Economic Confidence Index, which measures the optimism of business leaders about the prospects of the UK economy, has fallen for the fourth consecutive month to -65, in November 2024. This is down from a reading of -52, in October.

The IoD Index has reached its second-lowest reading since 2016.

The investment intentions dropped to -27 from -15 in Oct, and the headcount expectations also continued to fall, reaching -24 from -4 in Oct, which is the lowest reading since may 2020 (-33).

IoD asked business leaders about their expectations regarding changes to employer’s national insurance contributions. The IoD found that 83% expect the employer NI bill will increase. 50 % of respondents expect wage increases to be reduced, while 44 % expect prices to rise and 43 % expect employment to decrease. One quarter of respondents expects to absorb costs through lower margins, while the same number also plans to increase productivity. Over half (57%) planned to do two or more of the above.

Anna Leach is the chief economist of the Institute of Directors. She described the statistics as “sobering”.

She said that the Budget had undermined the foundations of the economy, reducing the ability of the private sector to invest in its businesses and workforce. The conflict between the government’s intentions to combat inactivity and the sharpness in the increase of employment costs is shocking. The government’s efforts to improve investment climate in the UK are at odds with the significant loss of profits that will undermine private sector investment.

There is a risk that growth will stall in the private sector because of the amount of resetting required by businesses. The social care sector and the charities are particularly concerned, as they feel that they have no choice but to reduce their services to the most vulnerable members of society. “The broader SME sector, as well family businesses, feels particularly exposed to multiple changes in the taxation system.”

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