Small business confidence at highest level in three years

Quarterly Small Business Index from FSB offers some glimpses of economic encouragement

Small business confidence at highest level in three years

Slowly but surely, the UK economy seems to be negotiating its way through the lower gears as it sets off on the long road to recovery. Whilst narrowly escaping a triple-dip recession showed how close things came to taking yet another turn for the worse, the fact remains that it ain’t quite as bad as it was five years ago. Indeed, even without looking in detail at the cold hard facts, the general mood of the nation’s small businesses should be proof enough that the situation is somewhat less dire today. The Federation of Small Business’s (FSB) quarterly Small Business Index shows that confidence among small business has risen to its highest level in three years, reaching 15.9 points in the second quarter of 2013. This is 14.6 points higher than the same time last year, when it stood at 1.3 points and up 9.6 points from Q1 2013. Moreover, it is the second highest reading since the Index began back in 2010. Indeed, the lowest the index has ever dropped was in Q4 2011, when it plummeted to -24.5, a full 40.4 points below where it stands now.

Taking a deeper delve into the Index’s findings reveals that one in five (20.6%) of small business expect business prospects to get slightly worse or much worse over the next three months – the lowest proportion since the Index began. And on the flipside, 36.4% expect prospects to strengthen over the next quarter, the highest proportion since Q1 2010. This all comes as a growing number of indicators suggest that economic conditions look set to stabilise in 2013, as opposed to zig-zagging as they did throughout 2012. Whilst the level of output still sits 2.6% lower than its peak in early 2008, the fact that it is 0.6% higher than the equivalent quarter in 2012 is encouraging when combined with the increasing levels of confidence we are seeing. Meanwhile, retail sales are gradually on the up as consumer confidence is starting to return to a decent enough position. Nevertheless, challenges remain on the investment and export side of things. Business investment in fixed capital fell by 0.4% quarter on quarter, and exports took a dip of 0.8%.

That said, it is difficult to discount the burgeoning confidence of our small business as anything but positive. A sector-specific analysis shows that the financial services sector currently have the highest confidence levels, with a reading of +42 recorded this quarter. This in itself is probably a sign that the economy is taking a turn for the better, especially as it represents a +9 increase on Q2 2012. And as the FSB points out, it probably has something to do with the FTSE 100 reaching its highest ever level in May, and the big banks reporting sharp profit rises this year. The real estate sector is also brimming with confidence, it would appear, with optimising up from -10 in Q2 2102 to +33 now. This has coincided with a steady rise in house prices during 2013, an at the second fastest growth rate (2.7% year-on year in March) since December 2010. Yet, despite the growth in retail sales and consumer confidence, small firms in the retailing sector are still struggling to feel optimistic, with confidence levels currently sitting at -10. Whilst up from -20 this time last year, strained consumer income and the growth of internet retailing is taking its toll on high street stores in particular.

Other areas explored by the Index also appear to offer a glimpse of light at the end of the tunnel. Firstly, the cost of finance is less for small businesses than a year ago with 31.5% of firms reported to have been offered interest rates of below 4% – this is up from 22.1% of firms in Q2 2012. And the proportion of firms being offered a rate of 8% or above fell back to 14.8% this quarter from 24.8% a year ago. As such, perceptions on the availability and affordability are improving – this despite the fact more than two in three firms (67.5%) continue to find finance unavailable to them. And whilst 54.8% of firms still believe credit to be unaffordable, it is nevertheless down from 61.5% compared to last year.

Encouraging vibes can also be felt from the following statistics in the Index: 

  • 4.8% of firms expect to increase staff levels in the next quarter, compared to 0.8% in Q2 2012;

  • 0.4% of firms are facing a revenue decline compared to previous three months (this figure stood at 2.2% a year ago); 

  • the proportion of firms aspiring to grow rapidly over the next year has risen to 8.5%, up from 7.2% at the same time a year ago; 

  • 15% of businesses plan to increase exports over the next three months.

Naturally, we don’t want to get ahead of ourselves. It is worth adding into the equation that 66.2% of business have reported an increase in business costs since Q2 2013, with utility costs at a 12-month high and affecting 53.2% of firms. In addition, more firms are citing labour as a key cause of rising costs. More pertinently however, the state of the economy is still regarded as the biggest barrier to growth by 62.6% of small businesses. 

John Allan, national chairman of the FSB offers the following thoughts: 

“After five consecutive quarters of year-on-year growth, confidence is moving in the right direction. Small firms want to employ more people and grow their business. They want to export and expect turnover levels to increase. This is all good news, but we must not be complacent. The Chancellor must use the Spending Review to build on this optimism. While there are positive signs, inflation and not being able to access finance will affect how quickly, and how much, small firms can grow and create jobs.”

We guess it is very much a case of onwards and upwards then – and one thing is for sure, it is our small businesses that are helping lead the charge. 

Adam Pescod
Adam Pescod

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