Small business confidence fell back into negative territory in the second quarter of this year, losing the ground made up by the first quarter’s welcome return to positive sentiment among small firms.
FSB’s Small Business Index (SBI) for Q2 2024 saw the headline confidence reading tumble to -10.8 points, a fall of 16.3 points from Q1’s +5.5 points.
Accommodation and food services businesses saw their score slip from -11.8 points in Q1 to -15.9 in the most recent survey.
Reported revenues over the second quarter were more or less in line with the previous three months, with just under a third of small firms reporting that their revenues increased in Q2 (32.1%, against 32.0% in Q1), and two in five noting a fall (41.4%, against 40.5% in Q1). These findings are lower than small firms had anticipated in Q1, when nearly half of small firms (45.7%) predicted that their Q2 revenues would rise, while only just under a quarter (23.6%) forecast a fall.
Looking ahead to Q3, revenue expectations have significantly moderated, with over a third of small firms (34.7%) anticipating an increase in their takings, and three in ten (30.1%) preparing for a decrease.
Growth aspirations for the coming year were also more or less in line with Q1, with over half of small firms (54.1%) saying they expect to grow over the next 12 months (Q1: 52.4%), and over one in eight (13.3%) saying they expect to contract (Q1: 12.6%). The proportion expecting to grow is the highest reading on this measure since Q2 2021.
Small firms once again pointed to the domestic economy as the most commonly-cited barrier to growth, picked by three in five small businesses (60.5%) – but this is a slight fall from the 64.6% registered in Q1, and could indicate a very slender easing of fears about the economy. Consumer demand was selected as a barrier to growth by a similar percentage in Q2 (34.6%) as in Q1 (35.6%), although labour costs (up from 26.3% in Q1 to 28.5% in Q2) and the tax burden (up from 19.2% in Q1 to 22.2% in Q2) edged upwards as concerns.
Access to appropriately skilled staff declined as a perceived barrier to growth, from nearly a quarter (24.8%) in Q1 to just over a fifth (21.1%) in the most recent survey, as did utility costs, going from one in five (19.6%) in Q1 to around one in six (17.2%) in Q2.
Elsewhere, the proportion of small firms saying the cost of running their business was higher than a year ago fell, from 83.7% in Q1 to 80.4% in Q2.
In terms of the factors driving that increase in costs, however, labour costs are the most commonly-cited, at 52.2%, the highest-ever reading on this measure, leapfrogging ahead of utilities (cited by 48.4%), which were the leading cost factor in Q1. Inputs (38.5%) and fuel (32.1%) were next in line. Rent set another record as a cost factor, selected by 26.9% of small firms, marginally increased from 26.4% in the previous quarter.
Small firms’ perceptions of the availability and affordability of finance took a tumble, with only one in nine small firms (11.6%) rating it as good, down from around one in six (16.5%) in Q1, while the proportion rating it as poor surged from 46.0% in Q1 to 53.2% in Q2.
Tina McKenzie, FSB’s Policy Chair, said:
“After a strong start to 2024, we were all hoping that the latest quarter would be just as positive for small businesses – if not more so. But sadly it was not to be.
“Small businesses are looking with trepidation at the Government’s forthcoming plans to change employment, which could both increase risk around small businesses employing people, and the costs when they do. The rise of labour costs will hold back economic growth, and points to the possibility of a contraction in small business job numbers, which would be terrible news for firms, for staff, for local communities and the national economy.
“Taxes and employment costs are already soaring for small employers. The Government should formally index the Employment Allowance to the rising living wage to help alleviate pressure on small firms and resolve the economic inactivity crisis. Every line in the Government’s employment plans must be checked for negative impact on growth and jobs.
“With reported revenues in the second quarter not matching the predictions small firms made at the start of the year, there are signs that the small business community found the going tough.
“Overall, the small business community is looking for reassurance from the Government that it is listening to their concerns, especially around tax and employment.
“The fall in confidence among small firms is disheartening, but need not become a self-fulfilling prophecy. With the right support, we know that small businesses can thrive and drive the economic growth that the Government has said is its priority.
“Now, as we head into the next quarter, we’re staring down the barrel at some tough challenges if we want to rebuild confidence.
“The riots have left small businesses picking up the pieces, so to turn this around, the Home Secretary needs to facilitate fair treatment of SMEs by the insurance industry. Additionally, the Government and police commissioners need to work together to clearly explain how small businesses can claim lost earnings under the Riot Compensation Act.”
