Small business confidence fell back into negative territory in the second quarter of the year, losing the ground it had regained in the first quarter after positive sentiment among small businesses picked up.
FSB’s Small and Medium Enterprise Index (SBI) for Q2 2024 saw the composite confidence index plummet to -10.8 points, down 16.3 points from +5.5 points in Q1.
Construction was the least optimistic of the major sectors, with a score of -20.7 points. Wholesale and retail trade followed with -19.5 points, a steep drop from +2.1 points in the first quarter. Accommodation and food services saw its score fall from -11.8 points in the first quarter to -15.9 points in the latest survey, while manufacturing, the report’s strongest major sector, fell from a healthy +19.2 points in the first quarter to -12.7 points in the second quarter, the biggest sectoral change between the two quarters.
Companies in the information and communications sector fell to -9.2 points from +7.1 points in the previous quarter, while the professional, scientific and technology sector fell from +14.3 points in the first quarter to -2.6 points in the second quarter, the smallest decline among the major sectors.
Reported revenues in the second quarter were roughly in line with the previous quarter, with just under a third of SMBs reporting an increase in revenue in the second quarter (32.1% compared to 32.0% in Q1), while two in five reported a decrease in revenue (41.4% compared to 40.5% in Q1). These results were lower than SMBs had expected in the first quarter, when almost half (45.7%) of SMBs expected their second quarter revenues to increase and just under a quarter (23.6%) expected a decrease.
Looking ahead to the third quarter, revenue expectations have moderated significantly, with more than a third (34.7%) of SMBs expecting an increase in revenue and three in ten (30.1%) expecting a decrease in revenue.
Expectations for growth over the next year are also broadly in line with Q1, with over half (54.1%) of SMEs expecting growth over the next 12 months (Q1: 52.4%), while more than one in eight (13.3%) expect contraction (Q1: 12.6%). The proportion expecting growth is the highest since Q2 2021.
Small businesses most often cited the domestic economy as a barrier to growth, with three in five (60.5%) citing the domestic economy, down slightly from 64.6% in Q1, potentially indicating that concerns about the economy have eased slightly. Consumer demand was chosen as a barrier to growth at a similar rate in Q2 (34.6%) as in Q1 (35.6%), although labor costs (up from 26.3% in Q1 to 28.5% in Q2) and tax burdens (up from 19.2% in Q1 to 22.2% in Q2) increased slightly as concerns.
Finding staff with the right skills was identified as a barrier to growth, falling from almost a quarter (24.8%) in the first quarter to just over a fifth (21.1%) in the latest survey, while utility costs also fell from a fifth (19.6%) in the first quarter to about a sixth (17.2%) in the second quarter.
Meanwhile, the percentage of small and medium-sized enterprises that said their business operating costs were higher than a year ago fell from 83.7% in the first quarter to 80.4% in the second quarter.
However, labour costs were most frequently cited as the cause of increased costs, hitting a record high of 52.2%, overtaking utilities (48.4%) as the leading cost driver in Q1, followed by inputs (38.5%) and fuel (32.1%). Rent set a new record as the cost driver selected by 26.9% of small businesses, up slightly from 26.4% in the previous quarter.
SMEs’ perceptions of financing availability and solvency plummeted, with only one in nine (11.6%) SMEs rated it as good, down from nearly one in six (16.5%) in Q1, while the proportion rating it as poor jumped from 46.0% in Q1 to 53.2% in Q2.
Tina McKenzie, FSB policy chair, said: “Following the strong start to 2024, we were all hoping that the latest quarter would be equally, or even better, for small businesses, but sadly this was not the case.”
“Small businesses are feeling anxious about the government’s upcoming plans for changes to employment which could increase both the risks for small businesses to employ people and the costs of doing so. Higher labour costs will dampen economic growth and signal a possible decline in small business employment – terrible news for businesses, employees, communities and the national economy.”
“Taxes and employment costs are already soaring for small employers. The Government should formally link employment benefits to a rising living wage to ease pressure on small businesses and solve the crisis of economic underperformance. Every element of the Government’s jobs plan must be checked to ensure it is not damaging to growth and employment.”
“The construction sector’s struggles, with the lowest confidence index of any major sector, underpin our calls for further support for small house builders, including reform of the Consumer Infrastructure Levy. Without new policies to unlock the potential of small house builders, the Government’s target of building 1.5 million homes will not be met.”
“There are signs that the small business community is facing tough times as reported revenues for the second quarter did not match the forecasts that small businesses made at the beginning of the year.”
“We are still waiting for action from the government on late payments, a perennial scourge for small businesses. This issue could be resolved by giving audit committees of large companies oversight powers over payment practices in their annual reports. It wouldn’t cost the government a penny and could significantly improve the cash flow of millions of small businesses.”
“Overall, the small business community wants assurances from the Government that it is listening to their concerns, particularly around tax and jobs.
“The decline in small business confidence is disappointing, but it does not need to become a self-fulfilling prophecy. We know that with the right support, small businesses can thrive and drive the economic growth that is a government priority. As we head into the next quarter, we face a tough challenge if we want to restore confidence.”
“The riots have left small businesses devastated. To turn this around, the Home Secretary must encourage the insurance industry to treat small businesses fairly. In addition, the Government and Police Commissioner must work together to clearly explain how small businesses can claim for business interruption losses under the Riot Compensation Act.”
Related
#FSB #SME #confidence #weakens #employment #costs #strain