Business confidence has experienced a notable decline at the beginning of 2026, delivering a significant setback to the Labour government as it strives to bolster the UK economy ahead of pivotal local elections scheduled for May. This development emerges from the latest Lloyds Bank business barometer, a key metric frequently referenced by Prime Minister Keir Starmer and Chancellor Rachel Reeves in discussions about corporate optimism and growth strategies.
Key Indicators Show Waning Optimism
The most recent data from Lloyds Bank reveals a downturn across two primary confidence measures. According to the survey, which gathered insights from approximately 1,200 large companies, confidence in respondents' own firms decreased by three points, settling at 44 per cent in January. Simultaneously, optimism regarding the broader UK economy fell more sharply, with sentiment dropping by nine points to a reading of 53 per cent.
Mixed Signals in Employment and Wages
Despite the overall dip in confidence, the survey did highlight some positive trends in the labour market. The net balance for hiring intentions increased for the first time in three months, with over half of the firms surveyed indicating plans to expand their workforce. Additionally, researchers noted that one-fifth of companies anticipate salary growth exceeding four per cent this year, suggesting potential upward pressure on wages.
Hann-Ju Ho, senior economist at Lloyds Bank, commented on the findings, stating, "Firms are reporting confidence in their trading prospects at the start of the year, despite a slight softening of wider economic optimism. This points to businesses' ability to manage external risks and a focus on growth opportunities." Ho also emphasised the encouraging rise in confidence within the services sector, which plays a central role in supporting UK economic activity.
Political Context and Economic Forecasts
This decline in business confidence arrives at a critical juncture for the Labour government, which is currently trailing behind both Reform and the Conservative Party in national polling. The government's central mission to drive economic growth faces further challenges, as forecasts for 2026 suggest the UK economy will expand at a slower pace than in the previous year.
Contrasting Data on Business Openings
In a contrasting development, data released by the Office for National Statistics (ONS) on Thursday indicated more positive trends in business activity across the country. The number of firms added to the business register between October and December 2025 reached 71,935, marking a 10 per cent increase compared to the same quarter in the previous year. Researchers also noted a smaller decrease in business closures during this period.
The transport and communication industries were highlighted as the sectors experiencing the most significant gains in business openings, suggesting resilience in specific areas of the economy. However, this uptick in new business formations does not fully offset the broader concerns reflected in the confidence survey, leaving the government with a complex economic landscape to navigate in the lead-up to the May elections.
