Martin McTague,
National Chair
Tina McKenzie,
Policy & Advocacy Chair

The third quarter of 2022 has been another downbeat one for small businesses, following on from the plunge back into negative confidence in the second quarter.

The biggest business story of the summer and early autumn was without doubt the shocking rise in energy bills, with FSB members reporting manyfold increases compared to a year ago. Some business owners, when receiving their new bills, initially thought the amounts listed were misprints because they were so out of line the numbers were with what they had previously been paying.

FSB worked tirelessly to get this issue onto the media and political agenda, and our efforts paid off when one of the first acts of the short-lived Truss administration was to announce a package of support for businesses as well as households on energy costs.

However, the damage to small businesses’ margins caused by spiralling gas and electricity prices has clearly been reflected in the Q3 confidence reading, the lowest ever outside periods of lockdown.

Businesses in accommodation and food services saw their confidence reading plunge from -29.1 in the second quarter to a staggering -67.5 in the most recent survey, as consumer confidence fell to new record lows and staff shortages persisted for many firms. The appalling reading for the hospitality sector is also a reminder that businesses in sectors outside those officially designated as “energy-intensive” will need confidence that the rises in their utility bills will be tempered – a small café whose coffee machine is too expensive to run, a boutique hotel which needs to heat rooms for guests, or a bakery which can’t afford to turn the ovens on are affected by rising bills just as much as a steelmaker or a chemical plant.

Adding to the pain, inflation for more or less everything else, not just energy, continued to rise across the quarter. Once again, this impact was reflected in the proportion of respondents saying that prices were higher than in the same quarter last year, which matched nearly exactly the Q2 finding for this, at 88.7% (Q2: 89.0%).

There were economic warning signs in many other areas, too, from a net balance of -4.4% of small firms reporting a rise in employee numbers over the quarter – the lowest such reading since the second lockdown in Q4 2020 – to concerns about consumer demand rising to become the second-most cited barrier to growth, cited by 32.9% of respondents, behind concerns about the domestic economy (60.6%).

Revenues generally suffered over the period: those reporting revenue growth or a flat performance were outnumbered by those noting a drop in revenues, with a net balance of -11.8%. Hopes for the future look to be subdued, with small businesses expecting to see their revenues increase over the coming quarter outweighed by the proportion expecting to see a drop-off (30.8% expect revenues to increase against 40.6% who expect them to decrease).

In marginally better news, the net proportion of small businesses aspiring to grow over the next 12 months grew slightly, from 46.6% in Q2 to 47.4% in Q3, while the corresponding figure of those expecting to contract fell very slightly, from 14.7% to 14.1% over the same period. However, both readings are notably worse than those registered in the same quarter last year (53.1% expected to grow and 11.2% expected to contract), showing how small businesses’ expectations have deteriorated over the previous 12 months.

The summer was taken up on the political scene by the race to become the next Prime Minister. The measures included in the mini-Budget at the end of September have since been largely unwound, although we were glad to see that the reversal of the increases to National Insurance was retained, ameliorating a significant cost pressure for small businesses and self-employed people. It was, however, disappointing that the increase to the dividends tax was not reversed alongside NICs, an oversight which has caused much financial pain to many in the small business community.

The recent Autumn Statement was far from a recipe for economic growth, meanwhile, and will add considerably to the tax burden borne by small firms and self-employed people. Stealth taxation will eat away at margins already hard-pressed by recessionary forces, with alarm bells ringing over GDP, which fell in the third quarter. We will continue to make the case that supporting the UK’s 5.5 million small businesses must be as high as possible on the political agenda, as their success is integral to the economy’s prospects, and there can be no growth if small firms are left behind..

Key findings

  • The Small Business Index (SBI) fell to -35.9 in Q3 2022. This marks a second consecutive quarterly fall as well as the second consecutive quarter in which the Index has stood in negative territory.
  • For the second consecutive quarter, the SBI stood in negative territory across all regions in Q3. Only two regions, the East Midlands and South East, recorded a quarterly improvement, which saw the former become the highest-ranking region, with a reading of -27.5 points.
  • The SBI deteriorated across most major industries in Q3 2022. The sharpest contraction was seen amongst businesses in accommodation and food services, amounting to a quarterly fall of 38.4 points. These businesses have been particularly impacted by the cost-of-living crisis, with consumers withdrawing cutting back on discretionary spending.
  • The net balance of small businesses reporting revenue growth over the previous three months stood at -11.8% in Q3 2022. This marked the second consecutive negative reading on this measure. Wholesale and retail, another sector disproportionately impacted by the cost-of-living crisis, saw a particularly weak reading on this measure, of -26.05%.
  • The net balance of small businesses reporting an increase in operating costs stood at 85.4% in Q3. This followed a net balance of 85.9% in Q2, marking the first quarter since Q1 2021 in which this reading has fallen, albeit only marginally. It should be noted that the 85.4% figure remains the second-highest net balance figure on this measure since data collection began. This illustrates the extent to which businesses continue to face cost pressures.
  • Utilities represented the most commonly cited cause of changing costs amongst businesses in Q3, being the case for 60.3% of survey respondents. There was a sharp uptick in the portion of firms citing the exchange rate as a source of cost changes, reflecting the weaker pound towards the end of the quarter.
  • A net balance of -4.4% of small businesses reported growth in their employee numbers in Q3, down from -3.6% in Q2. This marked the most negative reading since Q4 2020, when the UK grappled with its second national lockdown.
  • As of Q3 2022, 47.4% of small businesses expect to grow over the coming 12 months. The share of businesses expecting to downsize or close stands at 14.1%. The net balance thus stands at 33.3%, slightly up on Q2’s figure of 31.9%. The net balance remains relatively weak. For comparison, the net balance stood at 41.9% this time a year ago.
  • The domestic economy is the most commonly cited potential barrier to growth amongst businesses expecting to expand over the coming year, being cited by 60.6% of respondents. There was an increase in the share of businesses citing consumer demand, reaching 32.9%, reflecting expectations that consumer demand will weaken significantly as a result of falling real household incomes.
  • The share of small businesses applying for credit rose to 12.6% in Q3, from 11.5% in Q2. This came despite a near doubling of the Bank of England’s base rate over the quarter and could point to a growing need for businesses to cover cost shortfalls.

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