Small firms’ confidence levels recover despite subdued summer

Small business confidence regained some ground between the second and the third quarters of the year, but is still in negative territory for the sixth quarter in a row, according to FSB’s latest Small Business Index for Q3, in partnership with Google.

The headline confidence reading was -8.0 points in Q3, up from -14.2 points in Q2, but some way below Q1’s measure of -2.8 points. The last time the measure was in positive territory was in Q1 of last year, before rising inflation and the energy crisis took hold.

Among the major sectors, hospitality businesses had the lowest level of confidence, at -31.1 points for accommodation and food service activities. Retail and wholesale businesses were the next gloomiest, at -22.8 points, followed by construction at -7.7 points, manufacturing at -6.7 points, and information and communication at -3.5 points. The professional, scientific and technical sector was the only major segment to register a positive confidence reading, at 6.9 points.

The far lower confidence readings for small firms in hospitality and retail underscore the need for more support for these sectors, with the forthcoming Autumn Statement a chance for the Government to announce measures to help, such as an extension to the SME-focused 75 per cent business rates relief for retail, hospitality and leisure firms.

Small firms encountered mixed economic conditions in the third quarter, with a base rate hike in August followed by a decision to stick at 5.25% in September, and a welcome easing of inflation across the quarter, although rising fuel prices made an impact. Two in five small firms whose costs had changed compared with the same period last year said that fuel prices were a factor (40.4%), an uptick from the 37.3% who said the same thing in Q2.

Revenues over the previous quarter were marginally better than those reported in Q2, in keeping with the small recovery in confidence levels. A third (33.5%) of small firms reported that revenues increased over Q3, essentially unchanged from the previous quarter (Q2: 32.7%). Meanwhile, the proportion of small businesses reporting a drop in revenues over Q3, at 39.4%, was slightly lower than the 41.3% saying the same thing in Q2.

Likewise, there has been a small but welcome improvement in small firms’ revenue expectations over the coming quarter, with over a third reporting that they expect higher sales volumes (35.4%, compared with 32.4% in Q2), and three in ten (30.8%) saying they expect a decrease, down from 35.4% in the previous quarter.

Over the next year, half (49.6%) of small businesses aspire to grow in size, slightly down from the 51.3% who said the same thing in Q2, although the proportion expecting to contract also fell, from one in seven in the second quarter to one in eight in the most recent survey (Q2: 14.2%; Q3: 12.7%). The finding underlines the need for the Chancellor to look at how to boost small firms’ investment in growth in next month’s Autumn Statement.

Changes in employee numbers among small firms were finely balanced in the third quarter, as almost the same percentage said they expanded their payroll over the previous three months as said their workforce decreased in size (13.1% and 13.3% respectively). Looking ahead, hiring intentions have moderated somewhat compared to the previous quarter, with 11.7% of small firms saying they expect to employ more people, down from 15.5% in Q2 who said the same, with 9.1% reporting that they expect their staff numbers to decrease, very similar to the 9.4% finding from Q2.

The general trend towards stabilisation rather than growth or contraction was also seen among small exporters, with almost half (48.7%) saying their export volumes had stayed roughly the same in Q3 as in the previous quarter, up from just three in ten (30.3%) who said the same in Q2. However, this did mean that the proportion of exporters whose volumes rose fell from a third in Q2 (33.4%) to a quarter in Q3 (24.4%), with those reporting a decrease in exports also falling from 36.3% in Q2 to 26.9% in Q3.

Among businesses aspiring to grow over the next year, the domestic economy was once more the most commonly-cited potential barrier, chosen by 63.5%, up from 61.5% in Q2. Fuel cost concerns doubled in volume, from 7.9% in Q2 to 16.2% in Q3, while the cost of finance hit its highest level as a concern since Q1 2015, mentioned by 9.2% of small firms.

Rising costs ticked up slightly between Q2 and Q3, with 86% of small firms saying the cost of running their business was higher in Q3 than in the same period last year (Q2: 84.9%). Utilities (57.3%), inputs (43.1%), labour costs (42.8%), and fuel (40.3%) were the most commonly-cited causes of changes in business cost.

The findings on late payment underscore the need for the Government to take more action on the issue, with three in five small firms (60.8%) reporting that they have late payments, and with 27.9% saying they got worse over the quarter.

Martin McTague, FSB’s National Chair, said:

“After the economic turmoil wrought by the cost of doing business crisis over the past year and a half, our latest Small Business Index shows signs of stabilisation in small firms’ performance.

“The improvement in the overall confidence measure since Q2 is a good start, but we really want to see it firmly back in positive territory, rather than eight points below zero, as it is currently.

“We also need to beware that stabilisation does not turn into stagnation, and that intentions to invest and grow are not thwarted by economic circumstances, holding back the performance of the UK as a whole.

“The sun was frustratingly absent for much of this summer, and this will have weighed down on sectors linked to tourism and leisure.

“With retail and hospitality still trailing the confidence levels recorded in other major sectors by some distance, the Government must think carefully about how to support firms in those sectors, who do so much to enliven high streets, towns, cities, and communities in every part of the country.

“Small businesses were relieved to see a pause in the successive base rate hikes in Q3, but we must keep emphasising that the Bank of England should exercise caution and be alive to the risk of keeping the rate too high for too long. With the lending environment so tough for small businesses, the Bank should avoid worsening the situation by removing the valuable SME supporting factor.

“The SBI results show the pressing need for the Government to tackle the risk of stagnation among small businesses at the forthcoming Autumn Statement.

“The Chancellor must take a stand on late payment, building on recent Government work, as eliminating this scourge would add £2.5 billion to the economy, and save 50,000 firms every year.

“The 75 per cent business rates discount for small retail, hospitality and leisure firms is due to run out at the end of March next year – it must be renewed past that date, to give relief to small businesses in consumer-facing sectors. It’s well past time too for the archaic business rates system to be overhauled.

“We must also take action to tackle those problems holding the future of the economy back – one of the most stark is that, at present, the self-employed are not allowed to claim training in new skills as a business expense. These kind of clear flaws in the tax system must be solved if we’re to meet the productivity challenge.

“Small firms are paying close attention to the stalls being set out by political parties as the next general election gradually comes into view. Improving their operating environment will benefit the economy as a whole, as well as delivering political dividends.”