UK business confidence deteriorated markedly in September. The Lloyds Bank Business Barometer shows that the UK business confidence index dropped sharply from 53% in August to 41%, the lowest level since April 2025. Although this reading remains above the long-term average of 30%, it is now clearly below the average of 47% over the past 12 months. The decline is mainly linked to renewed escalation of tensions in the Middle East. Rising energy prices have driven up corporate cost pressures, while also intensifying market concerns about inflation and the broader economic outlook.

Firms' confidence in the macroeconomy weakened notably. Economic optimism among UK businesses fell 18 percentage points to 31% in September, below the average of 37% over the past 12 months. The survey shows that companies are mainly concerned about rising energy prices, overall cost increases, inflation, and global economic uncertainty. The proportion of firms that believe the overall economic outlook is optimistic fell from 64% to 52%, while those holding a pessimistic view rose from 15% to 21%. This indicates that the core of the decline in business confidence is not a sudden deterioration in demand in a single industry, but rather an external energy shock that has rekindled concerns about costs and the macroeconomic environment.

Firms' expectations for their own operations also weakened in tandem. In addition to being more cautious about the overall economy, companies also became more downbeat about their own future business conditions. The index for firms' own trading prospects fell 8 percentage points to 50%, below the average of 56% over the past 12 months. The proportion of firms expecting output to increase over the next 12 months fell 9 percentage points to 57%, although the proportion expecting business activity to decline also edged down only slightly to 7%. This means that most firms still expect their business to grow over the coming year, but their level of optimism is now clearly lower than before.

Manufacturing and services were the most visibly hit. By sector, the decline in confidence was fairly broad-based. Manufacturing confidence fell 19 percentage points to 36%, services fell 21 percentage points to 35%, and construction fell 8 percentage points to 47%. Retail was one of the few exceptions, with confidence actually rising 3 percentage points to 51%, mainly supported by improved customer demand and some better economic news. Overall, this round of confidence decline was concentrated mainly in manufacturing and services, which are more sensitive to energy and operating costs, while consumer-facing retail has temporarily shown greater resilience.

Smaller businesses are under greater pressure. Differences by company size are also very clear. Confidence among small businesses with annual turnover below £5 million fell 14 percentage points to 39%, the most pronounced decline. Confidence among firms with turnover between £5 million and £25 million fell 5 percentage points to 54%. By contrast, confidence among companies with turnover between £25 million and £100 million actually rose 3 percentage points to 75%. This reflects that smaller firms are more vulnerable to rising energy, raw material, and financing costs, while larger companies are relatively stronger in absorbing costs and maintaining operational resilience.

Price-raising expectations rebounded but have not yet spiraled out of control. Rising cost pressures have also begun to affect companies' pricing intentions again. The proportion of firms expecting to raise prices over the next year rose 1 percentage point to 52%, ending a previous three-month declining trend. However, Lloyds Bank noted that companies' price-raising expectations remain below the level of a year ago. This shows that although firms are facing higher costs, they are also constrained by market competition and the demand environment, and have not fully passed on cost increases to consumers.

Regional divergence is also evident. Among the UK's 12 regions and constituent nations, 10 saw a decline in business confidence. Among them, the South West of England fell 30 percentage points to 25%, the East Midlands fell 31 percentage points to 20%, and Wales fell 38 percentage points to 16%, the lowest among all regions. By contrast, the West Midlands performed strongest, with confidence rising 22 percentage points to 69%; the North East also rose 5 percentage points to 50%. Lloyds Bank noted that the scale of this month's decline in business confidence is similar to the drop seen earlier this year after the Middle East conflict first escalated. Overall, the main pressure facing UK businesses at present is not a sudden collapse in demand, but rather the energy and cost shock brought by the situation in the Middle East, which has once again weighed on confidence in the economic outlook. Manufacturing, services, and small businesses have been most visibly affected, while retail and some larger companies have temporarily shown greater resilience.