The requisite condition for the UK economy to suffer a notable slow-down in 2017 is a decline in investment intentions.
The idea is that businesses will hold back on investment as we move through Brexit negotiations.
Some observations worth pointing out at the start of the year:
- Small businesses are borrowing more, a sign that they are bullish on investment
- Once Brexit negotiations get underway more clarity, not less, becomes forthcoming
- Small business confidence is rising
The latter point has been reported by the Federation of Small Businesses (FSB) who today reveal that UK small business confidence in the last quarter bounced back to the level reported before the EU referendum campaign began.
FSB’s Small Business Index (SBI) has now moved into positive territory, which means that more small businesses feel confident than those that feel the opposite.
The headline confidence measure now stands at +8.5, up from -2.9 in the previous quarter and reaching almost exactly the same level as it stood at the start of 2016 at +8.6.
This survey confirms that at the start of 2017 the UK’s small firms are upbeat about their prospects.
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.”
Spare Capacity Falling
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.
Despite the overall positive picture, FSB 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,” says Cherry.
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," says Cherry.
FSB members went on to say 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,” says Cherry.