The House of Commons Library describes the UK economy in its latest monthly assessment as showing “unexpected resilience”, a fair summary of an economy that has absorbed another energy shock without falling back into stagnation. GDP grew by 0.4% in the second quarter, services expanded by 0.5% and business investment increased by 1.7%, while the ONS says the three months to June marked the seventh consecutive period of three-month-on-three-month growth. The Library’s description of Britain returning to “steady (if not spectacular) growth” is probably closer to what many businesses are experiencing than either the language of recovery or recession.
There is still a sizeable gap between an economy growing on paper and a business owner feeling noticeably better about trading conditions. The ONS Business Insights and Conditions Survey published on 20 August found that 15% of trading businesses had seen turnover increase in July, while 22% had seen it decrease. Economic uncertainty remained the most commonly reported challenge affecting turnover, cited by 29% of trading businesses, while among businesses employing ten or more people the cost of labour was the most frequently reported concern at 35%.
That combination helps explain why the current period feels difficult to categorise. Economic activity is continuing to expand and several forward-looking indicators have improved, but the improvement has yet to translate into broadly stronger trading conditions. For businesses making decisions about investment, recruitment or finance, this is less a question of whether Britain is now “doing well” than whether the risk of committing capital has become manageable enough to start moving again.
Cost pressures are changing rather than disappearing
The return of energy and supply-chain concerns makes the improvement in growth more complicated for businesses because stronger demand can arrive alongside a greater requirement for working capital. The latest ONS Business Insights release, published on 3 September, found that 28% of businesses with ten or more employees were concerned about international conflict affecting their supply chains during the next year, while 21% were concerned about shipping disruption. Those proportions were 17 and 12 percentage points higher respectively than in September 2025.
Earlier August data also showed that 61% of businesses expressed some degree of concern about energy prices, while a quarter of trading businesses considering price increases said energy prices were one reason for doing so. At the same time, 27% reported an increase in the prices of goods and services they had bought during July. These figures sit alongside the improvement in GDP rather than contradicting it: a company can be selling more and still find that higher stock, transport, energy or labour costs increase the amount of cash required to support those sales.
This matters particularly for businesses growing from a relatively tight liquidity position. More turnover does not necessarily produce more immediately available cash where customers pay on terms, additional inventory has to be purchased in advance or suppliers require faster payment. A period of modest economic expansion accompanied by volatile input costs can therefore create demand for working capital even among otherwise healthy companies.
The current labour market adds another layer. Unemployment was 4.9% in the latest period covered by the Commons briefing, while the more timely PAYE estimate published by the ONS suggests there were 94,000 fewer payrolled employees in July than a year earlier. The Commons Library also draws attention to the unusual divergence between employment measures, with Labour Force Survey data suggesting employment had increased while PAYE data showed a decline, and explicitly advises treating the survey estimates alongside other labour-market sources.
For employers, a softer labour market may eventually make recruitment less difficult, but there is little basis yet for assuming that labour costs have ceased to be a problem. The ONS found in August that cost of labour was still the most commonly reported challenge among businesses with ten or more employees, cited by 35%. Businesses may be getting some relief from the exceptionally tight hiring conditions of recent years while still carrying a materially higher payroll base than they did before the inflationary period.
Inflation has complicated the case for waiting on interest rates
Many businesses have spent the past two years with a fairly understandable assumption that the direction of borrowing costs would eventually be down. The BoE base rate peaked at 5.25%, fell by a total of 1.5 percentage points between August 2024 and December 2025, and now stands at 3.75%. The July meeting of the Monetary Policy Committee changed the tone of that discussion because only six members supported leaving rates where they were, while three voted for an immediate increase to 4%.
Inflation has also moved back in the wrong direction. The ONS reported CPI inflation of 2.9% in July, up from 2.6% in June, its first annual increase since March, while CPIH rose to 3.1%. Housing and household services were among the largest contributors to the increase, and the Commons Library records the Bank of England’s central projection as showing CPI inflation reaching around 3.2% in the fourth quarter. The MPC has said that the risks around that inflation outlook are tilted upwards.
For SMEs contemplating finance, the significance of the July vote is that postponing a transaction in expectation of substantially lower rates has become a more speculative decision. The Bank has not said rates will rise, and three members remain a minority, but a third of the committee actively preferring tighter policy is difficult to reconcile with the assumption that another sequence of cuts is imminent.
The distinction between the base rate and the actual cost of commercial finance is also important. Different lenders fund themselves through deposits, institutional facilities, securitisation, private credit and other sources, so commercial pricing cannot be read directly from the MPC’s headline rate. The Commons Library notes that five- and ten-year government bond yields have risen to around their highest levels since 2008, illustrating the wider pressure in capital markets even while the official base rate has remained unchanged.
A business owner deciding whether to finance an asset or expansion therefore has to compare a real opportunity available today with a future interest rate that nobody yet knows. If a £200,000 investment produces sufficient additional profit or efficiency at the finance cost currently available, waiting six or twelve months for an assumed reduction in rates may save some interest but sacrifice a larger commercial return in the meantime. Where the economics only work if rates fall materially, the proposed investment is giving the business a rather different warning.
The same logic becomes more pronounced where the funding requirement has a fixed date. Corporation Tax, VAT and PAYE liabilities do not move because markets expect a different base rate several months later. A business deciding whether to use cash to meet a tax liability or preserve part of that liquidity through commercial finance should be comparing the actual cost of funding with the value of retaining cash in the business, rather than building the decision around an interest-rate forecast.
The October Budget will arrive before the economic picture becomes much clearer
The other large unknown for businesses is fiscal policy. Public sector borrowing during the first four months of 2026/27 reached £57bn, which the Commons Library says was about £2bn above the OBR’s March forecast, while public sector net debt stood at 94.1% of GDP at the end of July. The OBR will publish a new Economic and Fiscal Outlook alongside the Budget on 28 October, when the government’s room for tax and spending decisions will be clearer.
Those numbers do not tell us that business taxes will increase, and there is little value in constructing a business financing strategy around speculation over individual Budget measures. They do give businesses a reason to understand their existing commitments before October, particularly tax liabilities, refinancing dates, capital expenditure and the amount of liquidity available if costs or taxes move unexpectedly.
There will be further evidence before then. New GDP data is due on 11 September, labour-market figures on 15 September and inflation data on 16 September, followed by the next Bank of England decision on 17 September. Each release will alter the detail, although it is unlikely that any single one will settle the broader question facing business owners: whether to keep waiting for conditions to become easier or make decisions using the environment already in front of them.
The current evidence increasingly favours the latter approach where the underlying business case is strong. Britain is growing slowly, businesses are investing more, retail demand has improved over the latest three-month period and services continue to expand. At the same time, the ONS is finding that economic uncertainty, labour costs, energy prices and international supply chains remain significant concerns, while the Bank of England has become sufficiently cautious that three MPC members wanted to reverse part of the previous easing.
That is a more useful backdrop for SME planning than either a bullish recovery narrative or another prediction of imminent recession. There are credible reasons to invest and credible reasons to protect liquidity, often within the same business. Finance can play a productive role where it allows a company to make an investment with a clear return, preserve working capital through a period of higher costs or manage a known liability without exhausting cash reserves.
For businesses that have been waiting specifically for substantially cheaper money, however, the latest data makes the timetable less comfortable. The UK economy has so far shown enough resilience to continue growing while inflation has returned above target, which gives the Bank of England less freedom to ease policy quickly. The Commons Library’s description of “steady (if not spectacular) growth” may consequently prove a useful way of thinking about the next phase for SMEs as well: conditions are improving enough to create opportunities, but probably not enough to make poorly timed or poorly structured financial decisions inexpensive.
