Small Business Growth Loses Momentum In June

Business growth lost momentum in the last three months to June after bouncing back strongly earlier this year, according to the latest NatWest survey of small to medium-sized businesses. The NatWest SME PMI® Business Activity Index posted 50.9 in June, down from 52.1 in May, to signal the slowest rate of growth for six months.

SME service providers experienced a particularly sharp slowdown in activity this quarter, as elevated inflation restrained consumer and business budgets. Subdued housing market conditions and rising interest rates also held back residential building work in the construction sector.

Despite the slowdown in growth, employment in small businesses increased across all sectors in June, outpacing that seen by large firms. This was linked to small businesses responding to forecasted business needs as well as backfilling vacancies as candidate availability improved.

Supply conditions meanwhile improved considerably throughout the second quarter of 2023. Both the manufacturing and construction sectors registered survey-record improvements in the delivery time for inputs, reflecting a normalisation of international supply chains after severe pandemic-related disruptions.

Stronger supply chains helped to bring down cost pressures at SMEs, with input prices rising at the slowest pace since January 2021. However, this masked a wide divergence by industry. Strong cost pressures persisted in the service economy due to elevated wage inflation, whereas manufacturers reported the fastest fall in input prices for nearly seven-and-a-half years.

Sebastian Burnside, NatWest Chief Economist, said:
“Businesses have had their hands full with a rapidly changing economic landscape this year. The widely forecast recession failed to materialise as demand held up well, but now steep increases in interest rates are adding a further threat. Many measures to improve sustainability have upfront capital costs but payback through lower operating costs in later years. Higher interest rates may dent the relative attractiveness of these investments, so businesses’ appetite will be tested.

“It is encouraging to hear reports that supply chain conditions have been improving, as businesses have said these often form a major barrier to action. And firms of all sizes are increasingly using sustainability credentials as an important criteria for choosing who to buy from.”

James Holian, Head of Business Banking at NatWest Group, said:
“These continue to be challenging times for businesses. We understand that business owners are cautious about the coming months.

“In these uncertain times, it’s important that businesses keep a close eye on their costs and their margins. Seeking advice sooner rather than later can make all the difference. I’d encourage business owners to use their networks, including their bank, to plan ahead.

“Frustratingly, we’ve seen sustainability take a backseat while business owners handle more immediate challenges. But it’s important to get sustainability back on the agenda for everyone. At NatWest we can support businesses with tools, such as our award-winning Carbon Planner, to cut carbon and costs.

We’d encourage businesses to reach out if they feel they need any help or support.”

Sustainability action plans at UK SMEs

NatWest also asked SMEs about their sustainability ambitions.

The survey indicated that environmental sustainability has fallen down SMEs’ list of priorities in comparison to the peak seen last summer. Around 35% of SMEs cited action on environmental sustainability as a high priority during the next 12 months, down from 36% in Q1 2023 and the lowest since this survey began more than three years’ ago.

In contrast, around 66% of large enterprises reported action on sustainability as a high priority in the next 12 months. Low carbon energy consumption was the most commonly cited focus area for large companies (77%), with survey respondents widely noting planned investment in solar panel installations.

Supply chain sustainability

NatWest asked UK companies about the actions they have already taken to reduce the carbon footprint of their global supply chains, and those they plan in future.

Businesses of all company sizes are likely to switch suppliers to help reduce their carbon footprint. Some 45% of SMEs intend to switch to suppliers with environmental credentials within the next five years, while around 42% plan to source suppliers that are based in the UK. Switching to suppliers with green credentials was the top priority for large firms, and the proportion looking to do so over the next five years was nearly double that seen for SMEs (86% vs 45%).