Business confidence falls to four-year low

Small business confidence in the UK has fallen to its lowest point in four years, a new report has revealed.

The Federation of Small Businesses’ (FSB) Q3 Small Business Index found that business confidence reached a low of -2.9, which is the second largest year-on-year fall in the index’s history. The largest drop occurred in the previous quarter of 2016 (Q2), and confidence has now fallen for three consecutive quarters.

Despite this, many small businesses are proving resilient, with the share of companies aspiring to grow over the next 12 months increasing in the third quarter, at 55 per cent. This was also the highest level since the end of 2015.

By comparison, the number of businesses expecting to downsize, close or hand on the business fell to 11 per cent.

The index also found that a number of companies had started taking on more staff this quarter, with seven per cent of small firms reporting an increased headcount. This was the first time small businesses have reported an increase in hiring this year.

Small exporters’ performance also improved, supported by the weakening pound, with more businesses expecting this to rise further in the next three months.

FSB national chairman Mike Cherry (pictured) said: “There is no doubt that the political shock of the Brexit result has taken place at a time of weakening business confidence. For the first time in four years, confidence is in negative territory. This persistent downward trend in UK business confidence reflects underlying issues that predate the Brexit decision.

“Small firms are resilient and will survive the current fragile economic outlook but, to avoid an economic slowdown, this data should be a wake-up call for our elected politicians. The UK small business community seek key domestic policy decisions if we are to grow, to invest, to export and to create jobs. We look to the party conferences and upcoming Autumn Statement to green-light infrastructure projects at local and national level, to simplify the tax system and to help reduce the costs of doing business.”

Rising costs are an ongoing concern, with 15 per cent of small firms reporting an increase in revenues this quarter, up from seven per cent at the start of the year. However, this number is expected to decline to nine per cent by the end of the year, in line with indications that economic growth is likely to slow later this year.

With the weakening of the pound, the share of businesses reporting exchange rates as a main cause of rising business costs has increased sharply from six per cent in Q3 2015 to 21 per cent this quarter.

However, labour remains the most cited cause of rising business costs. The introduction of the National Living Wage (NLW), and anticipated future increases of this, mean that businesses are likely to face continued increases.

More than three-fifths (62 per cent) of small companies cited the domestic economy as a barrier to achieving growth targets in the third quarter, a sharp rise from 49 per cent in the same period a year ago. However, this is only slightly higher than the 58 per cent reported in Q1 and Q2 2016, suggesting that the EU referendum is not to blame.