Confidence among UK small firms has risen to the highest level in over a year despite spiralling business costs, according to the latest Federation of Small Businesses (FSB) Small Business Index (SBI).
The SBI stands at 20.0 in Q1 2017, the highest figure since Q4 2015, and up considerably from the -2.9 recorded after the EU referendum.
The strong recovery has been spurred by increased international trade. A net balance of 15.6 per cent of small firms report a rise in export activity during the past three months, with a net balance of 30.5 per cent expecting international sales to increase over the next quarter. Both figures are at their highest level since the SBI began.
Gordon Millward, FSB regional chairman, said: “It’s hugely encouraging to see our small businesses trading more overseas, driving an exports-led recovery. We know small firms that export have higher turnovers than those who rely on the domestic market, so it’s crucial that the Government maximises cross-border trade opportunities for small firms.
“That includes negotiating an ambitious free trade agreement (FTA) with the EU as part of the Brexit process. The FTA must include a dedicated small business chapter and ensure the easiest possible access to the single market.
“Our latest Brexit research finds that over a quarter of FSB exporters would be deterred from trading with the EU27 by a tariff of any size. We cannot rely in the long-term on the boost that exporters have received from a weak pound. To maintain export growth, we need to focus on opening up new international markets and getting more small firms exporting.”
The recovery in the headline SBI comes despite a surge in the cost of doing business. A net balance of 64.5 per cent of small firms report an increase in operating costs over the past quarter, the highest proportion since the summer of 2013. Fuel (36.8 per cent) and labour (35.9 per cent) are cited most often as the main causes of this increase, with the exchange rate (26.9 per cent) also frequently flagged.
The average FSB employer will face £2,600 in additional employment costs over the coming year as a result of the rise in the National Living Wage, resulting National Insurance contributions and auto-enrolment.
These cost pressures are being exacerbated by rising inflation. The Consumer Price Index (CPI) rose above the Bank of England’s 2% target to 2.3% in March. Firms are struggling with increased prices when buying supplies, products and services, but the rise in inflation will also impact other bills, such as business rates.
Mr Millward added: “At a time of unprecedented political and economic uncertainty, small firms are being hit from all sides by mounting cost pressures. This month alone many have had to absorb a hike in business rates and the National Living Wage.
“Added to this are costs that have steadily risen, such as fuel, which our members are increasingly pointing to as a major cause of higher outgoings.
“The impacts of the spiralling cost of doing business are starting to show. The percentage of businesses seeking to grow in the next 12 months, although slightly up on last quarter, remains below the levels seen two or three years ago. Higher numbers of businesses also report they plan to downsize or close over the next year.”
Small firms are more positive about their ability to access finance. A record number of SBI respondents (74.5 per cent) were successful in their applications for credit in Q1. In addition, the balance of small firms describing the affordability of new credit as good has risen (29.1 per cent).
The net balance of small businesses intending to increase employment over the next three months is also up, to a near two-year high of 11.3 per cent. However, the balance of small firms reporting higher headcount for the last quarter has fallen from 2.9 per cent in Q4 to 2.1 per cent in Q1.
The SBI now stands in positive territory across most UK regions. Scotland is the exception, having posted negative confidence for five straight quarters, though its Q1 figure (-10) is the highest since Q2 2016. The East Midlands reports the highest confidence levels for this quarter (39.3) while London has rebounded from -1.7 in Q4 to 24.5 in Q1.
Mr Millward said: “Small firms are telling us loud and clear that they want to keep hiring. One fifth of our small businesses with staff employ non-UK EU citizens so guaranteeing the rights of EU workers based here should be a top priority for Brexit negotiators.
“On the domestic front, an increase in the Employment Allowance must be a key consideration for the Autumn Budget.”