Small businesses are losing confidence due to rising employment costs, a new report from the Federation of Small Businesses (FSB) has revealed. According to the FSB’s latest Small Business Index (SBI), the headline confidence reading plunged to -10.8 points in the second quarter of 2024, a steep drop from +5.5 points recorded in the first quarter.
Businesses in the construction industry seem to have the least optimism compared to other major sectors, with confidence plummeting to -20.7 points. The wholesale and retail industry followed suit, falling from +2.1 points in Q1 to -19.5 points in Q2. Meanwhile, the accommodation and food services sector declined further, with confidence slipping to -15.9 points from -11.8 points in the previous quarter. Manufacturing, which was the most positive sector in Q1 at +19.2 points, experienced the largest downturn in business confidence, nosediving to -12.7 points in Q2.
Businesses have also seen less revenue trickling in this quarter. There was an initial optimism with nearly half of small businesses forecasting an increase in Q2 revenues. However, only 32.1% actually saw a rise, while 41.4% reported a decline. It is no surprise that just over a third of small firms (34.7%) are expecting an increase in their revenues in the third quarter, while 30.1% are bracing for a decrease.
Employment costs are the most commonly cited factor in driving up business expenses, according to the report. 52.2% of small businesses identified them as a concern – the highest level on record. Utility bills, which was previously the top cost factor, has now fallen to second place. Other key cost pressures include inputs (38.5%), fuel (32.1%), and rent, which has reached a new high, cited by 26.9% of businesses, slightly up from 26.4% in Q1.
The outlook on finance availability has also deteriorated. Only 11.6% of small businesses rated it as good, down from 16.5% in the first quarter. Businesses describing finance as poor surged to 53.2%, up from 46.0% in Q1. Tina McKenzie, Policy Chair at the FSB, said she was concerned about the impact of rising costs on small businesses and the decline in business confidence. “After a strong start to 2024, we were all hoping that the latest quarter would be just as positive for small businesses – if not more so. But sadly, it was not to be,” she said.
“Small businesses are looking with trepidation at the Government’s forthcoming plans to change employment, which could both increase risk around small businesses employing people, and the costs when they do. The rise of labour costs will hold back economic growth and points to the possibility of a contraction in small business job numbers, which would be terrible news for firms, for staff, for local communities and the national economy.
“Taxes and employment costs are already soaring for small employers. The Government should formally index the Employment Allowance to the rising living wage to help alleviate pressure on small firms and resolve the economic inactivity crisis. Every line in the Government’s employment plans must be checked for negative impact on growth and jobs.”
McKenzie also emphasised the challenges facing the construction sector, which now has the lowest confidence rating among major industries. She has urged the government to provide more support for small housebuilders, including reforms to the consumer infrastructure levy to unlock the potential of small building firms and meet the Government’s target of 1.5 million new homes.
Despite these challenges, growth aspirations among small businesses have remained steady. Over half (54.1%) of small firms expect to grow over the next 12 months, the highest proportion since Q2 2021. However, the sector continues to face barriers, with concerns over the domestic economy, consumer demand, and rising labour costs at the forefront.
McKenzie stressed the need for urgent Government action, particularly on late payments, which remain a significant issue for small businesses. “The fall in confidence among small firms is disheartening, but need not become a self-fulfilling prophecy. With the right support, we know that small businesses can thrive and drive the economic growth that the Government has said is its priority.”
