Late emerging economic indicators and credit data from the final quarter of 2025 illustrate a challenging end to the year for businesses. Business investment fell by 2.7% quarter on quarter, although it remained 2% above Q4 2024 levels. This environment was reflected in a softening of higher value lending reported to Experian during the period. Demand for lower value facilities held up better than appetite for larger loans, suggesting that day to day cashflow management in a low growth environment remains a priority for businesses.
However, early economic and credit indicators for 2026 have shifted and are beginning to tell a more positive story – at least in some areas. There are signs that, following the Autumn Budget, some of the uncertainty that had previously weighed on sentiment has eased. Optimism around interest rates, improvements in PMIs, and stronger business confidence all suggest the environment may now be more conducive to growth.
Looking at some of these indicators in more detail: the February Composite PMI showed continued momentum from the previous month, with growth across both Services and Manufacturing. Service firms reported increasing domestic orders, while manufacturers recorded the sharpest rise in export sales in four and a half years. This is echoed in ONS confidence surveys, which show a decline in the share of businesses citing “falling demand” as a primary concern. These surveys also indicate improvements across other measures, including concerns about taxation and inflation.
In credit bureau data, it is still too early to determine whether improving macro indicators are translating into greater borrowing appetite for growth. However, delinquencies remained stable in the latest month, and default rates have improved significantly – now more than 15% lower than at the end of 2025.
There are, nonetheless, notes of caution. Rising unemployment and falling job vacancies form a challenging backdrop. Christmas trading updates highlighted that consumers remain price sensitive and selective. While overall retail performance proved more resilient than many anticipated, consumer caution persisted: value focused retailers continued to lead, while discretionary spending in higher ticket categories remained subdued. For SMEs, this translated into pockets of premium demand but ongoing weakness in big ticket and general merchandise sales. As a result, many firms maintained disciplined stock levels and prioritised working capital efficiency rather than signalling any material shift back toward investment. Similarly, despite a sharp improvement last month, the Construction PMI remains in contraction territory – albeit at a slower rate.
Overall, the UK SME lending market enters 2026 on a firmer footing, though confidence remains fragile. Economic signals are still mixed but trend more positively than in late 2025, while demand conditions remain uneven. Improved default performance and steadier sentiment provide some reassurance. For lenders, the priorities continue to be monitoring shifts in product mix, understanding sector specific pressures, and assessing whether improving credit performance will ultimately translate into stronger borrowing appetite as the year progresses.