THE CONDITIONS for UK small- and medium-sized enterprises (SMEs) deteriorated to the worst level in three years in the first quarter, new research has shown.
The inflation rate is outstripping wage growth and hampering consumer spending, while the weak pound is raising commodities and materials costs for SMEs, according to a study from the Centre for Economics and Business Research Limited (Cebr) and CYBG, owner of Clydesdale and Yorkshire Banks.
An index put together by the two groups, which monitors SME indicators such as business costs, capacity, confidence, employment, lending, revenue and bankruptcies, dropped by almost 10 points from 56.4 to 46.5 quarter on quarter.
This is the lowest level since the index was launched in early 2014, and over 30 points below its peak of 77.4 at the end of 2015.
Slower revenue growth, increasing spare capacity and a surge in bankruptcies all exerted downward pressure on the headline figure, the latest report said, with the number of business insolvencies almost six per cent higher than in the previous quarter.
In terms of regional breakdown, Northern Ireland and the West Midlands were the weakest performers, as poor employment growth, high levels of spare capacity and subdued lending took their toll.
Conversely, improved business confidence, relatively low levels of spare capacity and increased funding helped Wales, Yorkshire and the North East fare better.
Business confidence was also one of the two indicators actually strengthening in the overall index, with SMEs across the country posting improved sentiment, as well as expanding their staff compared to last year.
CYBG’s chief executive David Duffy said that monitoring and understanding how SMEs perform will be paramount going forward, especially in the post-Brexit era.
“Small and medium-sized businesses are the absolute engine room of the British economy,” said Duffy.
“Their future prospects are going to be ever more critical in a post-Brexit world, where we are dependent on a stronger and more competitive domestic economy.”
In UK, small firms represent 99.5 per cent of the total number of businesses and 52 per cent of total employment. With an annual turnover of more than £1.8bn in 2016, they account for 47 per cent of total business revenues, according to the report.
“With SMEs accounting for over 99 per cent of all UK businesses, their significance to the wider UK economy is unquestionable,” added Oliver Kolodseike, senior economist at Cebr.
“The results clearly point to challenging conditions during the first quarter of 2017. Business costs rose strongly while subdued lending and weaker than expected GDP growth also exerted downward pressure on the index.”
The country’s economy grew at a quarterly rate of 0.2 per cent, down from 0.7 per cent at the end of 2016. Consumer-focused service industries, such as retail sales and accommodation, posted particularly weak results.
“Encouragingly, however, business confidence and employment remain robust, adding to hopes that the weak reading of the SME Health Check Index in the first quarter was just a temporary blip, rather than the beginning of a more serious negative trend,” said Kolodseike.
Read more: The SME’s guide to P2P