Director Weekly  Disappointing new data for the end of 2025 shows that the UK economy remains fragile, yet there are signs that the outlook is improving

That means Q4 growth fell short of Bank of England expectations of 0.2%. Services growth stalled, while there was notable weakness in construction output. Overall, growth for 2025 ended up at 1.3% – higher than 2024 (1.1%), but below the expected 1.4%.

This stuttering performance reflects the significant damage done to economic activity by prolonged policy uncertainty in the second half of the year.

Yet shift our eyes away from the rearview mirror and instead look up the road, and we might see brighter prospects ahead.

The IoD’s Director Economic Confidence Index for January stood at -48, up from -66 in December. That’s the sharpest rise in confidence since directly after the general election of 2024.

Business leaders’ confidence in their own organisations returned to net positive territory, rising to +14 from -4. Revenue expectations hit +23 – their highest level since September 2024 – up from +8 in December 2025.

There are still reminders of the underlying fragility though. Investment intentions remain in net negative territory, at -5 (up from -21); similarly, headcount expectations remain net negative, at -2 (up from -14 in December). That tallies with January’s Labour Force Survey data, which showed unemployment rising to 5.1%.

It adds up to a sense that while conditions have stabilised, businesses are not yet ready to materially increase their capital or labour costs.

So what explains these latest shifts, and what might influence further changes in optimism and activity over the coming months?

Let’s start with policy. Things look better than a year ago, with fewer negatives on the table now than at this point in 2025. The autumn Budget passed without fresh disasters for business; while it raised taxes substantially, most of the burden falls on individual taxpayers – and is heavily back-weighted.

In the short-term, consumers benefit from factors that are bringing down inflation by as much as half a point, including falling energy bills and stabilising food prices. That will prop up consumer demand.

The ongoing shift towards lower interest rates is also beneficial for business. The Monetary Policy Committee held the Bank rate steady at last week’s meeting, yet another two rate cuts seem likely this year. Lower rates will both support business investment and reinforce consumer confidence.

The other important shift is that we have, mercifully, escaped the intense period of policy uncertainty that defined the run-up to the Autumn Budget. Yes, we have had other U-turns – and the political environment hardly inspires confidence that policy will be rock-steady. Yet the government continues to underline that March’s Spring Statement will be a “non-event,” fiscally speaking. Ministers may not be able to resist the temptation to make some announcements, but these should be limited in scope – setting out how departments will spend their budgets, say, rather than making meaningful changes to the fiscal picture. This attempt to reduce policy uncertainty is certainly welcome.

Beyond policy, one of the biggest stories of 2026 will be AI. How will it affect the economy? Clearly, one of the opportunities that AI offers is automation and cost control; some jobs are undoubtedly exposed.

Yet that will not be the full story. AI can also enable us to become more productive, helping us earn more, and help generate ideas that lead business to do new things, creating new jobs along the way. That’s been the story of every period of previous period of technological upheaval.

It’s clear that the economy remains fragile – yet it’s also true that some momentum seems to be building. Time will tell whether it can be sustained, but for now, these positive signs are much to be welcomed.

Find more from the IoD Directors’ Economic Confidence Index here.