Recent economic data for April points to a UK SME environment that remains resilient in activity terms but is facing intensifying cost and confidence pressures. Flash PMI readings indicate continued expansion, with the Composite index rising to 52.0 and manufacturing reaching its strongest level in nearly four years. However, this apparent strength in output is being offset by a sharp rise in input costs, driven largely by higher energy prices and ongoing labour cost increases. Survey evidence suggests that nearly 70% of firms are experiencing rising purchasing costs, with more than half reporting increases in input prices, highlighting sustained margin pressure across sectors.
At the same time, broader business sentiment has weakened. Despite continued expansion, business optimism has fallen to one of its lowest levels since late 2022, reflecting heightened uncertainty linked to geopolitical developments and cost inflation. This is reinforced by ONS survey data, which shows a growing proportion of firms expressing concern over energy prices and demand conditions. Nearly 30% of businesses now report being highly concerned about energy costs, while falling demand remains the most commonly cited concern, rising further into May. These trends suggest that softer consumer confidence and higher operating costs are beginning to feed more materially into business expectations and planning.
This weakening sentiment is also reflected in the outlook for business investment. Revised data shows that investment softened at the end of 2025, and forward-looking indicators point to further moderation in 2026. Rising labour costs—driven by increases in the National Living Wage and new regulatory requirements—alongside elevated energy prices are expected to weigh on cash flow and discourage capital expenditure. As a result, many firms are likely to delay or scale back investment plans, reinforcing the trend toward cautious, short-term financial management rather than longer-term expansion.
Credit bureau data continues to highlight a mixed but broadly stable picture. Headline risk metrics remain relatively steady, with modest improvements in credit scores offset by slight increases in delinquency and default rates. At the same time, debt balances—particularly in revolving credit—continue to rise, and the proportion of overdrawn current accounts has edged up, pointing to increasing reliance on short-term liquidity. This aligns with observed lending behaviour, where demand is concentrated in lower-value, flexible credit products rather than longer-term investment lending.
Overall, the UK SME lending market is entering a phase characterised by resilient activity but a mounting of pressure on margins, confidence, and investment. While growth indicators remain positive, the combination of rising input costs, weakening demand signals, and cautious business sentiment is shaping more defensive financial behaviour among businesses. For lenders, the key focus remains on monitoring liquidity stress, understanding shifts toward short-term borrowing, and assessing whether stable credit performance can be sustained as macroeconomic pressures persist.