Rise in small business confidence could signal end of recession

Small business confidence made a welcome return to positive territory for the first time in two years, the first evidence that the small business community has now come out of the late 2023 recession, according to FSB’s Small Business Index (SBI) for Q1 2024.

The headline confidence reading jumped up over 20 points to reach +5.5 points in the first three months of 2024, up from -15.0 points in the final quarter of last year.

Outside of COVID waves, this is the first confidence reading above zero since 2018, which makes it significant and important that it be sustained.

The gap in confidence readings among major sectors was notably narrower compared to the previous quarter, showing a gentle rising tide across the whole economy.  The most positive sector is manufacturing (+19.2 points), getting over a tough last quarter, with the least positive being accommodation and food services (-11.8 points) – a 31-point difference.

Sectors showing significant improvement from Q4 2023 to Q1 2024 include retail and wholesale (-29.8 points to +2.1 points), manufacturing (-26.2 points to +19.2 points), and professional, technical and scientific firms (-4.7 points to +14.3 points). Accommodation and food services made the largest recovery, going from -73.0 points in Q4 to -11.8 points in Q1.

The only major sector to see a decline in its confidence score between quarters, meanwhile, was information and communication, which saw a fall from +24.4 points in Q4 to +7.1 points in Q1, down by 17.3 points. Crucially, this still remains in positive territory.

Tina McKenzie, FSB’s Policy Chair, said, “Having small business confidence back in positive territory in the opening months of 2024 is a relief, after two years of it being underwater, and following on from a particularly difficult end to last year.

“The rebound in confidence levels in most sectors is a good indicator that the shallow recession recorded at the end of 2023 is firmly in the past, and small businesses are keen to look ahead to expansion and better trading conditions.

“Challenges do of course remain, especially for hospitality firms, whose outlook – though it made a strong recovery when compared with the end of last year – is still some way behind the other major sectors.”

Revenues and growth

Revenues reported over the first quarter declined slightly when compared with the final quarter of last year, perhaps unsurprisingly as we exited the so-called ‘golden quarter’.

But the same businesses report accelerating ambitions for revenue/growth for the next quarter. Over three in ten small businesses (32.0%) said their revenues increased in Q1 2024, while two in five (40.5%) reported a fall in their sales volumes. This marks the eighth consecutive quarter with a negative net balance of firms reporting revenue growth, and underlines that many small firms are dealing with uncertain finances following the shallow recession experienced at the end of last year.

Revenue expectations for the coming quarter were, however, notably brighter – nearly half (45.7%) of small businesses expect their revenues to be higher in Q2, with just under a quarter (23.6%) bracing for a drop in revenues, giving a net balance of 22.1%. By contrast, the Q4 survey found that almost exactly the same proportion of small businesses were expecting revenues to grow (31.6%) as contract (32.0%).

Growth expectations also rose, with 52.4% of small businesses predicting they would expand in the next 12 months, up from 48.2% in Q4, and the highest reading on this measure since Q4 2021. The share of small firms predicting that they would contract fell from over one in seven (15.0%) in Q4 to one in eight (12.6%) in Q1.

The domestic economy retained its place as the most-commonly cited barrier to growth in the first quarter of 2024, mentioned by nearly two in three small firms (64.6%), up from 61.8% in Q4. Consumer demand kept its second-place spot, cited by over one in three firms (35.6%), up from three in ten (30.7%) in Q4. Access to appropriately skilled staff increased notably, from a fifth (20.7%) in Q4 to a quarter (24.8%) in Q1.

Cost pressures

Inflation continued to take a toll on small businesses, with over four in five (83.7%) saying the cost of running their business was higher overall in Q1 2024 than in the same period in 2023, a slight increase on the 82.5% of small firms who said the same thing in Q4. There was a welcome drop in the proportion of small businesses who said their costs had significantly increased, going from a quarter (24.7%) in Q4 to 22.8% in Q1, continuing the decline on this measure recorded since it hit a height of 38.3% in Q4 2022.

Utility costs kept their spot as the most commonly-cited factor driving cost changes in Q1, mentioned by over half (55.2%) of small firms – a distinct fall from the 62.5% who pointed to utility costs in Q4. Labour costs climbed upward as a driver of costs, going from 45.7% to 48.1%, with inputs in third place at 36.5%, down from 41.6% in Q4. Rent reached a new record as a driver of cost changes, cited by 26.4% of small firms, the highest reading in the SBI’s history, beating the previous record of 25.3% from the same quarter last year.

Access to finance

Despite the lack of movement in the base rate, the situation has improved slightly for small firms seeking finance, with around one in six (16.5%) describing the availability and affordability of new finance as good, up from one in seven (14.5%) in Q4; likewise, the proportion of small firms rating it as poor fell from 52.0% in Q4 to 46.0% in Q1.

The rates on offer to successful finance applicants also decreased, with twice as many small firms offered a rate of up to 4% compared with the previous quarter (8.3% in Q1 against 4.2% in Q4), while the percentage being offered a rate of 11% or more fell from its record high of one in three (33.4%) in Q4 to around a quarter (26.1%) in the most recent survey.

McKenzie added, “While revenues over the first quarter suffered in comparison with revenues recorded during the previous three months, thanks to festive spending levels, the outlook for the next quarter is far sunnier, which is encouraging.

“Small firms may finally feel able to leave the survival mode they entered in order to cope with the successive blows of the pandemic, the cost of doing business crisis, and soaring energy bills.

“The domestic economy remains a big challenge as far as expansion plans are concerned, but if it performs better than expected, that could give small businesses the opportunity they have been waiting for to grow and flourish.

“The small business community took a big hit to its numbers in the wake of covid, with a loss of around half a million businesses. While there has been some recovery in the numbers since then, there’s still some way to go to make up lost ground.

“Politicians of all parties need to think about how they can give a real impetus to growth and investment, from start-ups to scale-ups. We’d also like to see banks and other financial institutions thinking about how they can treat small firms in a way that is fair and supportive, to help them achieve their ambitions – to everyone’s benefit.”