Small business confidence has recovered in the South East despite increasing operating costs, according to the Federation of Small Businesses (FSB’s) latest quarterly Small Business Index (SBI).
The SBI, which reflects how firms expect to perform over the coming quarter, hit +16 across the region in Q4 2016, up from -3 in the preceding three months. This means that more businesses feel confident than feel the opposite. Small business confidence rose to +8.5 for the UK as a whole in Q4. Almost all (94%) of small firms in the South East expect to remain the same size or expand operations in Q1 2017. Amid a fall in the value of the pound, four in ten (40%) exporters surveyed expect to increase overseas sales in the next quarter.
Small businesses in the region are facing challenges, however. Around two thirds (61%) report an increase in the cost of doing business compared to the same period last year, with labour costs mentioned most frequently as the main cause of this increase (30%).
While sterling depreciation has provided a boost for exporters, one in five firms (23%) sees it as a primary cause of increasing business costs alongside a related rise in the price of raw materials (20%).
Mike Cherry, National Chairman at the Federation of Small Businesses, said:
“We are delighted to see confidence bounce back at the end of 2016, effectively wiping out the fall we saw over the course of the year in the run-up to the EU referendum and its immediate fallout. The current economic outlook seems brighter, and UK small businesses are ambitious and want to make the most of it. Small exporters continue their strong rise, as UK goods and services become more competitive overseas and small businesses go out to find new markets and new customers.”
The Bank of England keeps a close watch on spare capacity and for Q4, the number of businesses operating below capacity fell to 44.2 per cent. This supports the case for leaving interest rates on hold for now as more small firms are expanding operations and boosting their workforce. Also, for the second quarter in a row, job creation is up. A net balance of nearly 10% of small businesses expect to increase headcount over the next three months.
Although confidence is positive and there are areas of strong performance, most small firms are not seeing this feeding through to profits. Profitability has dropped for the second quarter in a row. In addition, investment intentions remain subdued and have fallen compared to last year with costs of doing business continuing to rise. This must not be allowed to threaten future business activity.
A regional break down across the UK reveals a more localised and complex picture – with small business confidence in Scotland and London out of step with the rest of the UK and still in negative territory.
Mike Cherry, continued:
“Despite the overall positive picture, our members still face many challenges as rising costs squeeze margins even further. The falling pound is driving up the price of imports and rising oil prices are being reflected in higher fuel costs. These inflationary pressures and price competition are hitting the bottom line hard with the majority of small firms seeing their profits continue to fall.”
There has been a dramatic increase in the number of firms citing the exchange rate as the main cause of cost inflation, currently at 28 per cent, compared to just 5.4 per cent a year earlier, as the pound remains at consistently lower levels against other major currencies.
Given these conditions, the share of small businesses aspiring to grow over the next 12 months has slipped, with a significant increase in those expecting to stay the same size – 37.5 per cent compared with 27.4 per cent in Q2 2015. To increase economic growth and productivity, the Government must look at how the business policy framework can help all small firms move into moderate growth – and not simply focus on start-ups and scale-ups alone.
Mike Cherry, concluded:
“Our members tell us they are maximising their opportunities in this current positive economic climate. But with costs rising, they will need support for their confidence to translate into new economic growth and jobs. As policy makers prepare for Brexit negotiations and look to small firms to contribute to the UK’s economic success, we would urge them to be ready to act if trading conditions deteriorate. We also call on the Chancellor to make the 8th March a full-throated pro-business Budget, and believe an increase in the Employment Allowance, to help small firms boost job creation, would be a good place to start.”
The next FSB Small Business Index for the first quarter of 2017 will be published in April.