Economic confidence cools but small firms remain optimistic, says FSB

The latest Federation of Small Businesses (FSB) Small Business Index (SBI) shows small business confidence cooling. While confidence levels remain firmly in positive territory, these latest results show that small businesses appear more cautious about their prospects than in recent quarters.

Gordon Millward, FSB regional chairman, said: “The recent Budget left many small firms with real challenges to overcome in how they operate in future. Now they need reassurance from Government and policymakers; their confidence is crucial to driving the economy and job creation.”

The overall SBI reading at +20.3 is a significant decrease from +37.9 in the second quarter of 2015 and +41 reading a year ago. After an initial boost given by the clear General Election result, these results reflect the impact of recent changes announced at the Summer Budget, notably increased taxes on dividends and steep increases in the National Living Wage.

Lower levels of confidence are reflected in more firms reporting a fall in investment intentions this quarter, which have fallen from 26 per cent 12 months ago to 22 per cent this quarter.

This is coupled with a surprising rise in spare capacity among businesses, a key indicator for the Bank of England as it decides on any interest rate changes.

The number of businesses expecting to grow has also cooled slightly but remains positive. Nearly six in 10 small businesses (58.7 per cent) plan to grow in the next 12 months, down from 65.3 per cent in the previous quarter.

Some encouragement is provided by hiring intentions, which show that small businesses are likely to continue to create jobs, although at a slower rate than previously.

A net balance of 5.3 per cent of firms have increased staff numbers over the past three months, down from 8.9 per cent in the previous quarter. Annual wage growth continues to pick up, rising from 1.5 per cent in the first quarter of the year to 1.9 per cent this quarter, with businesses planning to increase wages at a rate of 2.6 per cent next year.

Skills shortages however remain a major issue for small firms with 36 per cent of firms reporting this as a barrier to growth, which is also driving up wage costs. Alongside not being able to find staff with the right skills, concerns about the domestic economy and increasing labour costs are all cited as key factors holding back further growth plans.

There is some positive news in the data on small business productivity. This continues to rise sharply, reaching three per cent this quarter, compared with 0.6 per cent 12 months ago.

Encouragingly, access to finance has continued to improve, with more firms successfully applying for finance and at lower interest rates. The Index shows exporters remain in robust mood, despite challenging international conditions and the headwinds of a strong pound.

Key findings for the Q3 2015 SBI:

  • The Small Business Index, a measure of small business confidence in the UK shows confidence levels at +20.3 points, down 17.6 points from last quarter. This is lower than this time 12 months ago (+41) but shows confidences still in positive territory.
  • A net balance of 2.1 per cent of firms exporting report an increase in overseas sales. Despite these results, exporters are optimistic about the three months ahead.
  • The number of businesses who have applied for a loan from their bank and been approved has increased to 62 per cent compared to 50 per cent 12 months ago.
  • Scotland, Wales, London and the South West each saw significant falls in confidence, with Wales and London reporting the lowest hiring intentions for the coming three months. Confidence remains strongest in the Midlands and the East of England.
  • Spare capacity has increased to 48 per cent from 40.7 per cent last quarter and from 47 per cent 12 months ago.

Mr Millward added: “Confidence has cooled as businesses face a number of challenges. Changes to tax treatment on dividends will affect many small business owners with modest incomes, while small employers also face steep increases in the National Living Wage just as they are preparing to bear the cost of pensions auto-enrolment.

“The reaction to these changes is reflected in the evidence we present today, which shows confidence levels amongst members cooling markedly.

“Despite confidence levels slipping back, our members remain steadfast in their intentions to grow, to create jobs and to export. The Government must however seek to reassure small firms and create the right environment for them to flourish.

“FSB will work with Ministers to mitigate some of the obstacles that small firms now face, and we look for positive commitments in the Enterprise Bill, Spending Review and Autumn Statement so that our members can boost economic growth and deliver the jobs the economy needs.”

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