Small UK firms see activity grow - but lag behind larger peers

There has been a pick-up in activity at UK small businesses in July but the pace of recovery remained “uneven” and lagged behind that of larger companies, according to data published by Royal Bank of Scotland.

Susan Fouquier, MD of business banking Scotland at RBS. Picture: contributed.
Susan Fouquier, MD of business banking Scotland at RBS. Picture: contributed.

The lender has revealed its latest UK small business purchasing managers’ index (PMI), which is designed to monitor the performance of private sector enterprises with up to 49 employees.

The headline all-sector small business activity index rose further in July from a record low in April, to 53.3 from 42.5 in June. Being above 50, the index pointed to more small firms seeing improved activity than a decline for the first time since February.

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The latest reading signalled the fastest rate of growth for exactly two years. Nevertheless the rebound was slower than across the UK private sector as a whole (equivalent index at 57.1).

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The report found that 36 per cent of small firms reported growth in July than in April. The number of small firms registering a decline in business activity was 28 per cent in July, down from 39 per cent in June and down by more than half from the peak of 78 per cent in April.

Susan Fouquier, MD of business banking Scotland at RBS, said evidence of growth in small businesses’ activity “is a positive sign of recovery but overall the data is still showing that smaller enterprises are lagging behind the activity seen among larger companies”. She added: “Recognising this disparity, we want to be agile in our support to SME business customers as they face into the next period of uncertainty.”

July data showed that small firms faced strong and above-average cost increases but were more optimistic about the outlook for activity over the next 12 months. The decline in employment eased for the third month running to the weakest since March, which contrasted with an accelerated pace of staff cuts among larger firms.

Small companies in the service sector experienced a modest overall increase in business activity, following the deep retrenchment seen in the second quarter of 2020.

At 50.8 in July, up from 40.3 in June, the business activity index registered above the 50 no-change threshold for the first time since February. That said, small businesses remain on a slower recovery path than the UK service sector as a whole.

Bright spot

Turning to manufacturing, such firms were seen as a bright spot in the small business revival. Its index registered 61.9, up from 49.8 in June and the first reading above the 50 mark since February.

As for construction, firms reported a sharp expansion of output volumes in July, with the small business activity index reaching 61.4, up from 49.5 in June. The latest reading signalled the fastest rate of growth since October 2003.

RBS principal economist Stephen Blackman said: “Longer term, the fortunes of small businesses rests on three powerful trends. First is the impact Covid-19 may exhort on our entrepreneurial drive. The second is whether the need for more collaboration between government and big business crowds out opportunity for small businesses. The final trend is the extent that our attention and spending shifts to the local.”

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