UK Business Confidence Stays Deeply Negative, Stagflation Risks Weigh on GBP

UK business confidence remains entrenched in negative territory, with output expectations well below pre-Iran-war levels and Middle East tensions adding fresh cost pressure on firms. The data offers no comfort for sterling or UK rate expectations, pointing to a stagflationary squeeze that complicates the Bank of England's policy path.

The Data: CBI and IoD Surveys Paint a Grim Picture

CBI Output Expectations: Still Deep in the Red

The Confederation of British Industry (CBI) output expectations balance nudged up to -24 in May from -25 in April. That marginal improvement does little to mask the deterioration from -13 in February, before the Iran war began. The output balance for the three months to May fell 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. That points to continued margin pressure across the CBI'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. Middle East tensions added a further layer of pressure as firms grew increasingly alert to the risk of additional cost increases.

IoD Confidence Index: Recovery from All-Time Lows

The Institute of Directors (IoD) economic confidence index recovered to -53 in May from -64 in April. That pulled 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. That may partly explain the less extreme negativity relative to the CBI's larger corporate membership.

Key insight: A reading of -53 is not a recovery by any conventional definition. It is a marginally less catastrophic reading from an all-time series low.

The Transmission to GBP and UK Rate Expectations

Output Expectations vs. Pre-War Levels

Output expectations at -24 remain well below the -13 recorded before the Iran conflict began. That suggests the Bank of England faces a demand backdrop that argues for easing even as Middle East-driven cost pressures keep the inflation picture complicated.

The Stagflationary Squeeze

Selling price expectations remaining elevated after April's three-year high means the stagflationary squeeze on UK businesses has not meaningfully abated. Firms face weak demand on one side and rising input costs on the other.