Small businesses are beginning the new year with increased pessimism as surging operating costs, weak domestic growth and flagging consumer demand hamper profits and confidence, according to the latest Federation of Small Businesses (FSB) Small Business Index (SBI).
The SBI stands at -2.5 in Q4 20171 marking a fourth consecutive quarterly drop in the Index from a year-high of +20.0 in Q1 2017. Almost a third (31 per cent) of firms expect their performance to worsen over the next three months while a quarter (27 per cent) expect an improvement. This is only the second negative reading recorded in the last five years. The first (-2.9) was registered in the wake of the EU referendum.
A record one in seven (14 per cent) small business owners are planning to downsize, close or sell their business over the coming three months. Three quarters of firms (73 per cent) report a rise in operating costs compared to this time last year. The figure is at a five-year high, with the increase frequently attributed to labour (40 per cent), utility (35 per cent) and input (33 per cent) costs.
Meanwhile profitability has fallen. The proportion of small businesses (41 per cent) reporting a fall in profits is at its highest since 2013.
The domestic economy is mentioned most frequently by small firms as a barrier to achieving growth over the next 12 months. More than half (55 per cent) are concerned it will stifle their ambitions. Consumer demand (34 per cent), access to appropriately skilled staff (34 per cent) and regulation (20 per cent) are also frequently flagged as barriers to expansion.
Mike Cherry, FSB national chairman, says, ‘As we progress to stage II of Brexit talks, negotiations with the EU27 are set to continue dominating the political agenda. While the swift agreement of a transitional arrangement and an ambitious free trade agreement with the EU are absolutely critical, it’s spiralling costs, weak growth and flagging consumer demand at home that are front of mind for small firms day to day. It’s troubling to see a record number of entrepreneurs seeking an exit as these challenges prove too much for many.
‘Our late payment crisis means £18 billion is being withheld from small businesses across the UK, stifling investment for growth and causing thousands of firms to go bust every year. The new Small Business Commissioner must make ending this debilitating crisis his top priority. Equally, small firms in dozens of local authority areas are still being denied the emergency business rates support they were promised last Spring. The delay may well have spelled the end for some firms left reeling by April’s bruising revaluation.
‘The announcement of measures to help businesses faced with surging costs at the Autumn Budget, including a VAT threshold freeze, an early switch in the inflation measure used to increase business rates and an end to the staircase tax, could help spark a recovery in confidence over the coming year. An uptick in optimism is by no means guaranteed though. These commitments need to be delivered as swiftly as possible and, in the case of the staircase tax, the Community Secretary’s Bill to reverse the unfair levy fast-tracked to protect firms that have been unexpectedly impacted.’
Lack of hiring opportunities
Only one in ten (13 per cent) small firms have increased their headcount this quarter. The figure is at its lowest in a year. An even smaller proportion (12 per cent) of small businesses expect to take on more employees over the coming three months.
Pessimism among small firms is particularly pronounced in the retail (-13 per cent) and construction (3 per cent) industries. Across both sectors, businesses report significantly lower levels of confidence compared to Q4 2016.
Conversely, exporting small firms remain optimistic about their prospects. The proportion reporting that international sales are stable or increasing (77 per cent) is up four percentage points compared to the same period two years ago, having been high throughout 2017.
Cherry continues, ‘Our exporters continue to benefit from a depreciated pound and strong economic growth overseas. Nine in ten small firms that do business internationally trade with EU nations, so securing the right Brexit deal will be critical to maintaining their momentum. Many also want to see new agreements struck with key markets beyond the Continent, not least the US, Australia and China.
‘Retailers and construction firms are disproportionately feeling the inflationary squeeze. As labour intensive industries, firms in these sectors will be hit hard by increases in auto-enrolment contributions from April.
‘With employment levels at near record-highs, we need to start reaching out to those furthest from the labour market. The government must make good on its manifesto commitment to implement a National Insurance Holiday for firms that give opportunities to the long-term unemployed, ex-military personnel and people with disabilities.’