Seven in ten small firms do not expect their performance to improve over the coming three months, according to the latest research from the Federation of Small Businesses (FSB).
Its quarterly UK SBI confidence measure stands at -8.8 in Q2 2019, down 22 points compared to the same period in 2018, marking a fourth consecutive negative reading. Such a sustained slump is a first for the index, which launched in 2010.
The considerable majority (68%) of small firms do not expect their performance to improve next quarter. Four in ten (41%) expect it to worsen.
Following April’s introduction of Making Tax Digital (MTD), an increase in minimum wage rates, and higher auto-enrolment contributions for employers, concerns about labour costs and regulation are soaring.
Seven in ten (71%) small firms say the cost of running their business is increasing. A record-high 48 per cent say labour costs are a main cause of this increase. Over a third (34%) say regulation is a primary cause of higher costs, up 12 percentage points compared to the same period in 2017.
The net balance of small businesses that are increasing headcounts – the proportion of those hiring new staff less the proportion reducing their team size – stands at a three-year low (-2%).
The share of small business owners expecting to grow their firms over the coming 12 months (45%) is at a record-low, with a record-high one in three (33%) citing labour costs as a major barrier to growth. The domestic economy remains the most frequently cited expansion constraint, flagged by more than six in ten (63%) firms.
Four in ten (42%) small firms say profits are down this quarter, and more than a third (34%) of exporters say international sales have dropped-off. Both figures are at a record-high.
FSB National Chairman Mike Cherry said “Small business owners are increasingly being left with our heads in our hands as we’re hit on all sides by fresh costs, reporting requirements, political uncertainty, and the re-emerging threat of a cliff-edge no-deal Brexit in just 20 weeks’ time.
“With attention switching to the race for Prime Minister, we need all candidates to set out their plan to back entrepreneurs and address the mounting challenges they face. Increasing tax, regulatory and employment burdens are weighing heavy on small businesses, making it harder for us to hire, export and expand.”
“Politicians need to up their game. We can’t hope to end this confidence losing streak until they make it easier for small firms to compete.”
The fall in small business confidence is particularly pronounced within certain sectors. Small manufacturing (+2.0), retail & wholesale (-29.4) and construction (-33.2) firms have suffered 25, 27 and 56 point drops in their SBI readings respectively compared to this time last year.
The manufacturing and construction Purchasing Managers’ Indices both fell below 50 last month, indicating a contraction in activity across these industries. May also saw the biggest drop-off in retail sales on record.
Cherry added “Some sectors are suffering more than others. Business rates, spiralling labour costs and higher input prices off the back of a weaker pound are making life a misery for our small manufacturers, construction firms and retailers.”
“Targeted intervention is desperately needed. Wholesale business rates reform is overdue and more must be done to ensure labour-intensive sectors benefit from the vital Employment Allowance.”