Small Business Index, Quarter 1, 2024

Foreword

What a difference a quarter makes. From the disappointing -15 points recorded in the final three months of last year, headline small business confidence has rebounded strongly in Q1 2024, to +5.5 points – the first above-zero reading for two years since Q1 2022. Looking back beyond the period of COVID turbulence, this is the first positive reading since 2018.

The bounce in confidence correlates with the relatively robust economic growth measured in the first three months of the year, putting the shallow recession from the second half of last year firmly in the rear-view mirror. Or that is, at least, what small firms will be hoping, as they make plans for the rest of the year.

There are, as always, clear differences between major sectors in terms of how optimistic they are, but it is welcome to see a much narrower spread in confidence levels than in the previous report, indicating an upspring across much of the economy, rather than just a limited slice. The only major sector to see a decline in optimism between Q4 and Q1 was information and communication, which fell by 17.3 points to reach +7.1 in the first quarter – still, crucially, in firmly positive territory....

Q1’s GDP momentum was not uniformly reflected in small firms’ revenues, which declined slightly when compared with the final quarter of last year. Over three in ten small businesses (32.0%) said their revenues increased in Q1 2024, while two in five (40.5%) reported a fall, making it the eighth consecutive quarter to show a net negative revenue balance. However, with the festive season in the last three months of the year, it is perhaps less surprising for revenues

It is certainly heartening that revenue expectations for the second quarter leaped upward, with nearly half (45.7%) of small businesses expecting their revenues to be higher in Q2, with just under a quarter (23.6%) bracing for a drop. This is a significant improvement on the expectations in the previous quarter, when almost the same proportion of firms expected their revenues to rise (31.6%) as fall (32.0%), and we can only hope that this rebound in revenue expectations is matched by reality, to cement the economic recovery from recession and put small firms firmly back on the path to expansion.

Employee numbers followed a similar pattern to revenues, with a net balance of -3.9% of small businesses reporting growth in employee numbers in Q1, the eighth consecutive quarter with no growth on this measure. Looking ahead, though, small firms are more bullish about their employment intentions, with a net balance of around one in 11 (9.1%) expecting to increase headcount in the second quarter, although previous SBI results shows that bullish hiring intentions do not always come to fruition, and the impact of rising labour costs on recruitment should not be underestimated.

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By the time the next iteration of this research is published, a new Government will be in place. Whoever wins the General Election in early July, the messages coming through from small businesses are clear: they want to expand and take on staff, and are looking for policies which will help provide a sturdy platform for growth. The domestic economy is still by some distance the largest perceived barrier to growth among small firms, cited by over three in five (61.5%), followed by consumer demand (30.7%) and labour costs (27.3%).

We will do our utmost to make sure the next Government listens to small firms, and takes action on their priorities, from overhauling business rates to make the system fairer and less burdensome, to grasping the nettle of late payments and bringing in measures to clamp down on big businesses with poor payment practices towards their smaller suppliers, restoring the small profits threshold for corporation tax to the previous level of £250,000 and pledging not to increase the small profits rate, improving access to finance and closing loopholes in protections for those giving personal guarantees, and much more. The next Government should make a Small Business Act one of its first legislative commitments, so that the strong economic growth we all want to see is powered by the industry and energy of small firms.

Executive Summary

Key findings this quarter:

The FSB Small Business Index (SBI) increased to 5.5 in Q1 2024 from -15.0 in Q4. This marked the first positive reading since Q1 2022.

• This return to positive territory reflects an improving UK economy. March saw GDP grow for its third consecutive month, therefore confirming that the UK has exited the technical recession it entered in the second half of 2023.
• The improvement in the headline index was broadly exhibited across the regions. Small business optimism over the next three months was most prevalent in the North East, Yorkshire and the Humber. Meanwhile, London (the only region to have a positive reading in the previous quarter) recorded a broadly neutral score, and the South East recorded a negative score.
• Over the previous three months, the net balance of small businesses reporting revenue growth stood at -8.5% in Q1 2024. However, looking ahead to the next three months, the net percentage rose to 22.1%. This is the strongest positive reading since Q1 2021.
• Exports rose from -10.8% in Q4 2023 to -8.2% in Q1 2024. Exports are expected to be broadly flat in Q2 2024.
• The net balance of small businesses reporting an increase in operating costs was broadly similar to last quarter, at 79.6% compared to 79.0% in Q4 2023. Despite this, the score is significantly lower compared with Q1 2023 (88.7%), reflecting a further slowdown in inflation.
• Small business headcounts failed to record growth for the eighth consecutive quarter (net balance of -3.9%), but they also expect to expand their staffing levels, on net, in the next three months (9.1%). This is an improvement from Q4 2023, where a net balance of -4.5% for staff numbers was recorded.
• The share of small businesses aspiring to grow over the next twelve months surged to 52.4% in Q1. This is the highest share of businesses hoping to expand in more than two years.
• Despite these aspirations, the number of small businesses applying for credit slipped to 14%. This follows a three-year high of 15.5% in Q4 2023.
• Perception of credit affordability and availability remained negative in Q1. The credit index improved but remains firmly negative at -25.4.
• The net balance of small businesses expecting to increase investment stood at 9.9%. This is the highest figure recorded since Q4 2022. Improving investment expectations comes alongside forecasts of rate cuts from the Bank of England.

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