The IoD Directors’ Economic Confidence Index, which measures business leader optimism in prospects for the UK economy, rose to -17 in February 2023, up from -28 the previous month and a near-record low of -64 in November. Confidence in the UK economy is now similar to the time of the Omicron restrictions in December 2021.

When those who said they were pessimistic about prospects for the UK economy were asked to pinpoint the main reason why, the most popular answers in February were political instability (26%), difficulties in our trading relationship with the EU (23%) and the rate of inflation (18%). The main reason for the improvement is lessening concern about the rate of inflation.

The index of confidence in business leaders’ prospects for their own organisations also improved in February, rising to +41, up from +37 in January. Leaders of mid-sized companies, employing between 50-249 people, felt the most confident about their own organisation’s prospects; the smallest and largest were the least confident.

When asked about negative issues facing their organisation, the main concern was the UK economy (cited by 51%), closely followed by skills shortages (49%) and the cost of energy (43%).

A third of IoD members (33%) now believe ‘inflation has already peaked’, up from a quarter (24%) in January. However, a sizeable majority remain of the view that the peak is still to come, even though CPI inflation actually peaked back in October 2022.

Kitty Ussher, Chief Economist at the Institute of Directors, said:

“Business sentiment is improving from its historic lows, driven primarily by a growing sense that prospects for inflation are improving and the economy is proving more resilient than previously feared. However, it still remains in negative territory with more business leaders pessimistic about the economy than optimistic.

“In order to really shift the dial, what’s needed is a clearer sense of direction from government, continued improvement in our relationship with the EU and proof beyond doubt that inflation is back under control.

“While sentiment remains subdued, government policy will need to work harder to encourage businesses to put capital at risk to undertake the investment the economy needs. That’s why we’re urging the government to prioritise investment incentives in the forthcoming Budget.”