Small firms demand government action after ‘disheartening’ slump in confidence
Small businesses have suffered a “disheartening” drop in confidence as employment costs take their toll, a new study today warns.
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 Britain’s smaller firms, according to the Federation of Small Businesses (FSB). The organisation’s latest Small Business Index, for the second quarter of 2024, saw the headline confidence reading tumble to -10.8 points, a fall of 16.3 points from the previous quarter’s +5.5.
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Hide AdTina 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.”
Construction was the least optimistic of the main sectors in the latest snapshot, with a score of -20.7 points. The wholesale and retail sector was not far behind, on -19.5 points, a tumble from the +2.1 points registered in the first quarter. Accommodation and food services businesses saw their score slip from -11.8 points to -15.9 in the most recent survey, while manufacturing firms went from a healthy +19.2 points in the first quarter - the most positive main sector in that report - to -12.7 points in the second quarter, the biggest sectoral swing between the two periods.
Small companies operating in the information and communications sector saw their confidence reading fall to -9.2 points from +7.1 in the previous quarter, while professional, scientific and technical businesses declined from +14.3 points to -2.6 points, making them the least negative of the major sectors.
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Hide AdAccording to the poll of more than 1,100 small business owners and sole traders across the UK, 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 per cent, against 32 per cent in Q1), and two in five noting a fall (41.4 per cent, against 40.5 per cent in Q1). These findings are weaker than small businesses had anticipated in Q1, when nearly half of small firms predicted that their Q2 revenues would rise, while just under a quarter had forecast a fall.


Looking ahead to the third quarter, revenue expectations have significantly moderated, with more than a third of small firms (34.7 per cent) anticipating an increase in their takings, and about three in ten (30.1 per cent) preparing for a decrease. Growth aspirations for the coming year were also more or less in line with the first quarter, with 54.1 per cent saying they expect to grow over the next 12 months, and 13.3 per cent saying they expect to contract.
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 per cent) - though this is a slight fall from the 64.6 per cent registered in Q1, and could indicate a very slender easing of fears about the economy, the FSB noted.
The proportion of small firms saying the cost of running their business was higher than a year ago fell, from 83.7 per cent in the first quarter to 80.4 per cent in Q2. In terms of the factors driving costs, however, labour costs were the most commonly-cited, at 52.2 per cent, the highest-ever reading on this measure, leapfrogging ahead of utilities (cited by 48.4 per cent), which were the leading cost factor in the opening three months of the year. Rent set another record as a cost factor, selected by 26.9 per cent of small firms, marginally increased from 26.4 per cent in the previous quarter.
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Hide AdSmall firms’ perceptions of the availability and affordability of finance took a tumble, with only 11.6 per cent rating it as good, down from 16.5 per cent in Q1.
McKenzie said: “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.
“The construction sector’s woes, with the lowest confidence reading among the major sectors, underpins our calls for more support for small housebuilders, such as reforming the consumer infrastructure levy, so small building firms can access the finance they need.”
She added: “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.”
FSB’s Small Business Index survey was conducted in partnership with Google.
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