Small Business Index, Quarter 3, 2024

Economist's view

As the UK economy moves into a phase of slower growth for the second half of 2024, small business confidence has also shifted – from quite pessimistic to very pessimistic.

The worsening picture of small business confidence was broad-based across regions and sectors, but a few sectors saw a particularly marked deterioration from last quarter. One common thread across these sectors (hospitality, wholesale and retail, manufacturing) is that they tend to have low margins, so it may be that cost concerns play a role in this quarter’s data.

While small businesses have reported slightly lower cost growth overall, there is a chance that expectations for an increase in taxation and employment costs played a role, given government messaging on these topics when this quarter’s survey was in field, which was before the Budget on 30 October.

Another common thread across these three sectors is that they are, on the whole, more highly linked to the consumer. Given that household spending continues to be subdued, it is not surprising that pessimism is more commonplace amongst businesses in these sectors. Indeed, expectations around the Budget might have also been a factor in relation to its impact on household finances.

Small firms have also faced a noticeable change in offered interest rates this quarter. Only 10.2% of firms were offered a rate of up to 4%, down from 21.6% last quarter. At the other end of the spectrum, 35.6% of firms were offered a rate above 11%, up from 26.1% last quarter. This is likely linked to the increase in UK bond yields seen over September as markets digested news of the changing fiscal rules.

Fortunately, the combination of higher interest rates and lower optimism didn’t have much impact on investment plans in this quarter’s data, with the net balance remaining only slightly positive. Growth ambitions also remain broadly similar to Q2, with just over half of small firms hoping to grow over the next 12 months, compared to 14.6% that expect to shrink. There was a small uptick in the percentage of firms looking to sell over the next year to 3.1%. This is the highest share since Q4 2022 and aligns with news suggesting that UK dealmaking has seen a recent resurgence.

The outlook for small businesses is a nuanced one. Our central forecast is for conditions to improve, but risks are increasingly weighted to the downside. The Bank of England should continue its rate cutting trajectory, supporting firms both through their finance costs and by supporting household spending power. Consumers are also expected to be supported by continued real wage growth, which should boost spending gradually over time.

Other risks to businesses are continuing to crystalise. Perhaps the most pertinent of these is the ongoing exacerbation of conflicts across the Middle East and in Ukraine, which threaten to lead to further disintegration of economic and political ties. The outcome of the US election will also have an impact, given its role as a global superpower.

Key findings

• The FSB Small Business Index (SBI) decreased to -24.4 in Q3 2024 from -10.8 in Q2. This marks the lowest reading in almost two years.
• The fall in the headline index was reflected across the regions. Small business pessimism over the next three months was most prevalent in Scotland. London was the only region to record an improvement from Q2, but nevertheless still remains in negative territory. 
• In Q3 2024, the net balance of small businesses reporting realised revenue growth was -13.8%. Expectations for future revenue also remain negative, with a net balance of -4.0% anticipating an increase. 
• A similar trend is observed in exports, in which the net balance has shown a decline at an accelerating rate, dropping from -0.4% in Q2 2024 to -10.6% in Q3 2024. Looking ahead, businesses expect a deterioration in export value in Q4 2024, with a net balance of -6.6% of exporting businesses forecasting a decline.
•  The net balance of small businesses reporting an increase in operating costs fell this quarter to 73.7%. 
• Small business headcounts failed to record growth for the tenth consecutive quarter. On net, businesses now expect to cut their staffing levels over the next three months. 
• The share of small businesses aspiring to grow over the next twelve months fell to 51.2%. The domestic economy led the factors reported by firms to be weighing on their growth prospects. 
• There was an increase in the share of small businesses applying for credit, up to 16.5% in Q3. However, the share of successful applicants among those who applied fell, and the average interest rate increased to 8.3%. 
• Despite this, small business perceptions of credit availability and affordability improved over the quarter. The credit index increased 4.5 points on Q2 2024 but remained negative, at -29.7. 
• The net balance of small businesses expecting to increase investment fell further, to 4.0%, having stood at 7.6% in Q2 2024.

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