FSB: Welcome rebound in business confidence

SME Publications/ SME XPO 2024

Confidence among small businesses has recovered strongly in the first quarter of 2023, with FSB’s Small Business Index (SBI) headline confidence measure bouncing back significantly from the depths of lockdown-equivalent levels back up to lightly negative territory at -2.8 points.

This is a significant upturn from the deeply negative finding of -45.8 points recorded in the last quarter of 2022, but is still some way below the 15.3 point reading registered in Q1 2022, a year ago. A lightly negative reading means that more small businesses still feel pessimistic than optimistic, but the scale of the improvement in sentiment is significant, and is the third-largest quarter-on-quarter increase in the SBI’s history.

All the major industry sectors tracked in the SBI saw improvements in their confidence ratings, with wholesale and retail, accommodation and food, manufacturing, and information and communication all seeing major increases – although despite the uptick, these sectors still remain in negative territory. The professional, scientific and technical sector was the only major sector tracked by FSB which ended up in positive territory, with a confidence reading of 14.9 points.

Falling sales were an issue for many small firms over the first quarter. Two in five small businesses said their revenues fell over the course of the first three months of this year (41%), compared with one in three who said they had seen an increase in sales (34%).

The revenue outlook for the next quarter was viewed with more optimism, however, with two in five small businesses (39%) expecting to see their sales rise, against one in four (26%) bracing for a drop.

Linked to this, growth aspirations for the next quarter improved slightly, with 46% of small businesses anticipating they will grow in the next quarter, up marginally from 45% in the previous quarter, while the proportion saying they expected to downsize, sell, or close the business fell from 16% to 13% over the same period.

Exports suffered between January and March, with two in five small exporters (40%) saying the value of their exports fell over the first quarter, while only one in five (22%) said they had increased.

On inflation, yet another series high was reached, with 92% of small businesses saying their costs were higher than in the same period last year, with utilities the main culprit (cited by 63% of businesses whose costs had changed), followed by labour costs (45%), inputs (44%), and fuel (40%, although this was notably down from 54% in the previous quarter).

The economy was the most commonly-cited barrier to potential growth, noted by over three in five small firms (61%), followed by utility costs, cited by one in three (33%), and consumer demand, mentioned by three in ten (30%).

A new SBI record of 71% was reached among small firms saying that salary costs were higher than the same period a year ago.

The squeeze on small firms’ financing options continued, with just one in eight small businesses (12%) rating the affordability and availability of new finance as good, with over half (51%) saying it is poor.

Martin McTague, FSB’s National Chair, said: “Our latest Small Business Index data shows that small firms may be about to turn the corner and rebound after the pandemic and the energy crisis, with confidence recovering alongside improved optimism for Q2.

“However, there are still plenty of dark clouds on the horizon that could dampen small business recovery. The prospect of further interest rate rises is causing significant disquiet, at the same time that costs remain at serious highs.

“If rate hikes outpace or outlast the prices they are meant to control, this would be an extra pressure on small firms whose cash reserves remain at historic lows, and it’s no surprise that small firms’ views of available finance options are downbeat, in line with their abilities to invest and grow.

“In addition, the withdrawal of the Energy Bill Relief Scheme leaves a group of small firms exposed to high prices in fixed-rate contracts from last year unable to negotiate a new contract – due to a standoff between energy companies and Government. Utility bills were still cited in our survey as a driver of inflation and a barrier to growth, despite the EBRS only closing at the end of the first quarter.

“While our research may provide a glimmer of hope that things are looking up, it’s important to remember that small businesses have shown incredible grit and determination in the face of adversity, and these figures are a real testament to that.”

SME Publications/ SME XPO 2024