Recent economic updates and early-year data point to a more fragile backdrop for UK businesses than was evident at the start of 2026. The Spring Statement confirmed that growth expectations for the year have been revised down, while emerging geopolitical risks and disruption to global energy supply chains are contributing to renewed inflationary pressures. At the same time, the labour market shows clearer signs of softening, with unemployment rising, wage growth slowing, and vacancies remaining below pre-pandemic levels. Together, these factors suggest that cost pressures and demand uncertainty continue to weigh on business conditions.
Despite this more challenging backdrop, forward-looking indicators continue to signal some resilience in underlying activity. PMI readings remain in expansion territory, supported by services and improving export demand in manufacturing. However, this momentum is uneven. Construction remains in contraction, and weakening employment indicators highlight that growth is not yet broad-based. Survey evidence also points to persistent cost pressures, with both labour and energy cited as key drivers of planned price increases, suggesting continued pressure on margins over the coming months.
Credit bureau data reflects this mixed environment. Encouragingly, credit risk metrics have continued to improve, with default rates falling sharply and delinquency levels stabilising. This has been accompanied by modest improvements in credit scores, indicating a degree of resilience in underlying portfolio quality. However, these improvements sit alongside signs of continued pressure on business cashflows. The proportion of accounts overdrawn has increased, while utilisation of revolving credit remains elevated, pointing to ongoing reliance on short-term liquidity.
At the same time, borrowing behaviour continues to reflect a cautious approach to growth. Increases in revolving credit balances, alongside continued expansion in loan volumes, suggest that firms are making greater use of shorter-term and lower-value lending facilities. This points to a preference for flexible, working-capital-focused borrowing rather than committing to larger, long-term financing. Asset finance balances have continued to rise, albeit more gradually, indicating selective investment in operational capacity rather than broad-based expansion.
Overall, the UK SME lending market enters the next phase of 2026 facing a more complex and uneven environment. While credit performance has improved and activity indicators remain broadly positive, underlying demand conditions and cost pressures continue to constrain confidence. The divergence between improving risk metrics and persistent liquidity pressures will be a key dynamic to monitor. For lenders, priorities remain focused on understanding shifts in product mix, identifying sector-specific vulnerabilities, and assessing whether improved credit performance will translate into more sustained borrowing demand as macroeconomic conditions evolve.