Business confidence across Britain has tumbled to its lowest point in nearly three years, with mounting labour costs and trade pressures forcing companies to freeze hiring and slash investment plans.
According to the Confederation of British Industry (CBI), the UK’s private sector output expectations index fell to -30 in May from -21 in April which means that more firms now expect business activity to decline rather than grow, the weakest confidence reading since September 2022.
Tony Danker, Director-General of the CBI, said: ‘Higher labour costs, weak global demand, and trade tensions are putting companies under immense pressure. Firms are being forced to delay key decisions on recruitment and investment.’
Cost Pressures Squeeze Business Operations
The grim assessment comes as businesses grapple with a perfect storm of financial pressures that threaten to derail Britain’s economic recovery.
Employers are reeling from significant cost increases across multiple fronts. The National Living Wage jumped nearly 7% this year, whilst National Insurance Contributions surged by £25 billion from April. Energy bills and raw material prices continue their volatile trajectory, stretching cash flows to breaking point.
These mounting labour costs are pushing many companies to consider hiring freezes or even workforce reductions. ‘We’re pausing recruitment until at least the fourth quarter,’ said one survey respondent in the manufacturing sector. ‘We simply can’t absorb the current cost of expansion.’
Trade Tensions Disrupt Export Markets
Trade friction is adding another layer of complexity for British exporters. US tariffs on UK steel and aluminium, remnants of the Trump era that remain in force, have severely dented competitiveness abroad.
Maria, a Midlands-based exporter of construction components, noted: ‘US tariffs have added 15% to our export costs. That’s made it incredibly difficult to maintain our American client base, and we’ve already lost two key contracts.’
Mixed Signals from the Institute of Directors
While the CBI’s data signals growing pessimism, the Institute of Directors (IoD) offered a slightly more optimistic outlook. Its members reported a modest increase in optimism, though overall sentiment remains cautious. The IoD warned against excessive government spending, arguing that it could result in higher taxation to fund growing public debt.
Can the Bank of England Intervene?
The Bank of England now faces pressure to support growth by cutting interest rates. Some analysts expect the base rate to fall to between 3.5% and 3.75% by the end of the year if inflation continues to decline and the economic outlook weakens further.
Although GDP growth beat expectations in the first quarter of 2025, recent indicators suggest that this momentum may not last. Business investment, in particular, is likely to slow if confidence remains low and borrowing costs remain high.
What This Means for UK Businesses and Workers
The coming months will test both businesses and workers as companies contemplate staff cuts and reduced hours to contain spiralling labour costs.
Export performance may remain subdued whilst trade frictions persist, and policy uncertainty continues discouraging long-term investment.
Clear government direction and supportive monetary policy will prove crucial in preventing a broader economic downturn.
Meanwhile, businesses must focus on efficiency improvements, digital transformation, and diversifying into alternative markets to weather the storm ahead.
