UK firms report easing pessimism as IoD confidence index climbs

Business sentiment in the United Kingdom showed a marked improvement at the start of 2026, as the Institute of Directors’ monthly survey reported a rebound in firms’ economic outlook and rising revenue and export expectations. The IoD’s economic optimism index rose to -48 in January from -66 in December, based on responses from 578 businesses surveyed between January 16 and 28, most of which employed fewer than 50 staff.

Confidence in firms’ own operations also strengthened sharply, moving into positive territory at +14 in January from -4 in December. The survey recorded revenue expectations at their highest level since September 2024 and export expectations at their strongest since July 2024, signalling improving demand conditions for many companies even as headwinds remain.

Despite the uptick in sentiment, directors signalled restraint. The IoD said businesses still intended to trim staff numbers and cut investment, albeit to a lesser extent than before. Anna Leach, IoD chief economist, summed up the mood: “Overall, there's a sense that, while revenues and general conditions have stabilised, businesses are not yet ready to increase either their capital or labour costs materially.”

The January improvement lifted the IoD index to its best reading since May and follows an unusually weak patch last autumn; the series, which began in 2016, hit an all-time low of -74 in September. That backdrop helps explain why even a sizable month-to-month swing leaves the index deeply negative on a historical scale.

The IoD’s reading aligns with other early indicators of a modest thaw in activity. The IoD’s Director Weekly commentary highlighted preliminary purchasing managers’ index data, saying, “January’s Flash UK PMI data from S&P Global, for instance, highlights the ‘strongest upturn in UK private sector business activity since April 2024.’” Final PMI figures were due later in the week.

Separate business surveys paint a mixed picture beneath the headline improvement. Lloyds Commercial Banking’s business barometer, covering 1,200 firms with annual sales of at least £250,000 and conducted between January 5 and 20, slipped to a net balance of +44 in January from +47 in December. Lloyds’ net economic optimism fell to +28, a one-year low, reflecting divergence between firms’ trading confidence and broader economic expectations. Hann-Ju Ho, senior economist at Lloyds Commercial Banking, said, “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.”

Policy moves appear to have contributed to the shift in mood. The improvement extended gains since finance minister Rachel Reeves’ November budget imposed fewer immediate tax rises than feared, and the IoD highlighted a string of recent government announcements it said offered limited but helpful support to some sectors. The IoD cautioned that while “hopes that the UK economy is turning a corner are beginning to grow as employers make the most of the hand they’ve been dealt by policymakers,” the recovery remains fragile without stronger, sustained policy action.

For markets and policymakers the message is nuanced: firms are more optimistic about current trading and nearer-term demand, yet remain cautious on hiring and capital spending. That pattern points to a growth phase led initially by revenue stabilization rather than a broad-based revival in investment or employment, leaving the economy sensitive to both domestic policy choices and external shocks.