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22 September 2016

Business confidence falls into negative territory for first time in 4 years

  • Small business headline confidence measure falls for third quarter in a row; concerns grow that domestic economy will weaken
  • In the short term, small business headcount, growth and exports all rise this quarter - and access to finance hits record levels

The Federation of Small Businesses (FSB) has found that UK small business confidence has continued to fall, dipping into negative territory for the first time since 2012. Business owners feeling confident are outnumbered by those that feel the opposite.

However, FSB found many immediate economic conditions improving, with small firms reporting greater access to finance, a rise in new employment and reduced spare capacity in their businesses.

In the first data gathered since the UK’s decision to leave the EU, the FSB Q3 Small Business Index (SBI) found business confidence in negative territory (-2.9). This is the second largest year-on-year fall in confidence in the Index’s history, with the largest drop occurring in the previous quarter of 2016 (Q2). Confidence has now fallen for the last three quarters in a row.

Despite this, FSB found many positive signs of small businesses proving resilient and getting on with the job in hand, in spite of a fragile economic outlook in the longer-term, spurred by political uncertainty caused by the outcome of the EU referendum. Many firms may have ‘priced-in’ the impact of the EU referendum result in advance of the vote, with others now looking for immediate growth opportunities in the wake of the result.

The share of small businesses aspiring to grow over the next 12 months also ticked up this quarter, now at 55 per cent, the highest level since the end of 2015. On the flip side, the share of businesses expecting to downsize, close or hand on the business fell to 11 per cent. This is despite a rise in those who report a weakening of the domestic economy in the future.

Small businesses have started to take on new staff, with a net balance of 7 per cent of small firms report increasing headcount this quarter. This is the first time that smaller companies reported an increase in hiring this year. Small businesses also expect this positive trend to continue into the final quarter of 2016.

Credit availability has continued to improve. The SBI credit availability and affordability indices stand at their highest levels since records began at the start of 2012. This will be welcome as spare capacity continues to fall, suggesting a need for investment capital may soon become more widespread.

Small exporters' performance has also improved, backed by the weakness in sterling, with more businesses expecting this to rise further in the next three months.

Mike Cherry, FSB National Chairman said: “There is no doubt that the political shock of the Brexit result has taken place at a time of weakening business confidence.  For the first time in four years, confidence is in negative territory.  This persistent downward trend in UK business confidence reflects underlying issues that predate the Brexit decision.

"Small firms are resilient and will survive the current fragile economic outlook, but to avoid an economic slowdown this data should be a wake-call for our elected politicians.  The UK small business community seek key domestic policy decisions if we are to grow, to invest, to export and to create jobs. We look to the party conferences and upcoming Autumn Statement to green-light infrastructure projects at local and national level, to simplify the tax system and to help reduce the costs of doing business."

A net balance of 15 per cent of small businesses report an increase in revenues this quarter, up from 7 per cent at the start of the year. However, this net balance is expected to decline to 9 per cent over the next three months, in line with indications that economic growth is likely to slow later this year.

While the weakness of sterling has helped to boost exports, the share of businesses reporting exchange rates as a main cause of rising business costs, has increased sharply from 6 per cent in Q3 2015 to 21 per cent in this quarter. We expect increased costs of imported materials and indeed goods and services for retail to begin to feed into rising costs for firms and consumers.

Labour costs remain the most cited cause of changing business costs. The introduction of the National Living Wage (NLW), and anticipated future increases of the NLW, means that many businesses, particularly in sectors such as wholesale and retail, accommodation and food services, are likely to continue to face increased costs. Pay growth is expected to slow further to 1.6 per cent over the next 12 months.

Over three fifths (62%) of small businesses cite the domestic economy as a barrier to achieving growth aspirations in Q3 2016, sharply up from just under half (49%) in the same quarter a year ago. However, this figure is only slightly higher than the 58% seen in Q1 and Q2 2016, suggesting that this cannot be attributed to the EU referendum result. Indeed there are indicators of a loss of momentum in the UK economy since the end of 2015. Brexit cannot be the only issue which needs attention from Ministers in the coming months.

The next FSB Small Business Index for the fourth quarter of 2016 will be published in January 2017.