Is rising business confidence a sign of ebbing economic uncertainty?
Written by Kunal Sawhney, CEO, Kalkine
As the pandemic impacts are slowly fading, the economy is gradually moving to normalcy with growing confidence among the businesses. The latest Lloyds Bank Business Barometer has shown improvements in both trading prospects and economic optimism, which has led the Business confidence in the country to bounce back to its highest level in five months. Lloyds Bank Business Barometer moved up by five points to 44%, with 10 out of 12 regions in the country reporting growth in the confidence.
The confidence surge was across the sectors with manufacturing and construction reaching their highest level since the start of the pandemic to 54% and 51% respectively, while the Retail confidence increased to 47% and Services confidence remained unchanged at 38%.
Business confidence, which measures a range of financial and economic aspects, is a key economic indicator giving an overview of how the businesses view the trade in the coming future based on production, orders, and finished goods in the sector. Businesses across the globe have been upbeat for the last some time with the hopes of recovery in the economy and continuously lower cases of covid.
The positive aspect of the business confidence growth is that it is has been on an upward trajectory with businesses remaining confident about their sales and hiring amid hopes of strong growth in the year ahead. However, there has been some uncertainty as well regarding overall economic conditions and prospects through the first half of the year, and now the geopolitical worries related to the Russia-Ukraine war are adding to it. The sales growth has been mainly on the domestic level, and the export growth is yet to reach the pre-pandemic levels yet, which may weigh on the confidence if the war escalates.
An interest rate hike could play the spoilsport
The optimism among the businesses is high, but at the same time, there is concern prevailing about the interest rate hike. Over one-third of firms (38%) surveyed by Llyods have raised their concern about interest rates rising to 1%. Inflation is at its record high and is likely to keep moving up with rising energy prices contributing the most in the coming month. Bank of England (BoE) has already raised interest rates twice, and there are expectations of a few more in near future.
It’s a common perception that higher interest rates would limit consumer spending as it increases the cost of borrowing and reduces disposable income; however, it also negatively impacts the business confidence with businesses taking less risk for investment and expansion. Another factor is that higher interest rates usually lead to the strengthening of the currency, which not only makes imports cheaper but makes the export less competitive.
Confidence is rising but government support required
Business confidence is returning to the levels we had seen before the pandemic; however, staffing and inflation would be a major concern going forward. Businesses have been facing challenges of staff turnover since the pandemic. Manufacturers are struggling to get the required skill and simultaneously facing the pressure of retention, raising the input price inflation.
The business confidence index is primarily used to check growth and anticipate curves in economic activity; however, the war situation may alter the trajectory if the businesses become overtly cautious responding to slow spending of consumers or intent to save more depending on the duration of the war. Upbeat business confidence leads firms to spend more on investment and look for expansion and hire more people, with hopes of a sizeable future return. At a time when the economic growth has not been what was being expected, the geopolitical worries may dampen the sentiment. Businesses would expect a government grant rather than any form of a loan if the situation deteriorates from here, as loans would only reduce their future borrowing power and eventually the confidence.
