Small Business Index, Quarter 3, 2019

FSB FOREWORD

The sky-high levels of uncertainty about the outcome of the Brexit process continue. With the EU having granted a ‘flextension’ until 31 January, and an election having been called, it is important that all political parties note the corrosive effect of uncertainty on small business confidence, which is in negative territory for the fifth consecutive quarter –unprecedented in the history of the SBI.

Following the outcome of the election, we need to see a decision reached on the outcome of the Brexit process. Any deal (Withdrawal Agreement and Political Declaration) must allow for a transition period of sufficient time to allow smaller businesses to adjust to whatever the end state relationship with the EU will be.

The impact of uncertainty is now weighing heavily on small business sentiment in relation to capital investment and exporting. This quarter’s Small Business Index shows that the share of businesses intending to expand their capital investment stands at its lowest level since our records began in 2012.

The volatility in the value of sterling as the prospect of no-deal emerges, retreats, and re-emerges, is hurting smaller exporters. Our data shows that, for the second successive quarter, more small businesses report a decline in the value of their exports than report an increase. The net balance of small business exports is now at a record low. A major source of increased cost pressures on small businesses in Q3 is sterling volatility. The proportion of firms reporting this as an issue rose by seven percentage points, from 15 per cent to 22 per cent.

The domestic economy remains the greatest obstacle to growth for small firms, with consumer demand rising to be the second biggest barrier to expansion. As Brexit uncertainty seeps through to consumer behaviour, many smaller businesses are facing the twin threats of high input prices and shrinking consumer demand.

And the prognosis for the next quarter is also pessimistic in regards to both exporting and hiring. The net balance of firms expecting an increase in exports is in negative territory for only the second time since our records began. The net balance of firms expecting to increase hiring activity over the next three months stands at five per cent. This represents a decrease of five percentage points from the last quarter.

Our message for any future administration is clear: we urgently need to bring Brexit uncertainty to an end and refocus on the neglected domestic agenda. That means bringing forward an immediate review of the flawed business rates system, ending the scourge of late payments, tackling the looming crisis in apprenticeship funding, turbo boosting our digital and transport infrastructure to help striving small businesses, and incentivising small businesses to take forward capital investment, exporting and innovation.

Mike Cherry, National Chairman

Martin McTague, Chairman, Policy and Advocacy

ECONOMIST’S VIEW

While much has happened on the UK political and economic scene over the past quarter, the key message from the Q3 2019 FSB Small Business Index (SBI) mirrors that of the previous quarter: the latest SBI report, as well as the most recent economic data releases, largely paint a worrisome picture.

Although business confidence marginally rose in Q3 2019 (climbing by 0.7 points to -8.1), it has now stood in negative territory for five consecutive quarters. Yearon-year, the Index is down by 6.4 points and has only been lower in five quarters since 2010.

At a sectoral level, accommodation & food services and manufacturing businesses recorded large quarterly declines in confidence, of 47.8 and 11.8 points respectively. It has been an especially volatile year for manufacturing data, with pre-Brexit stockpiling in both March and October leading to large swings.

On the other hand, confidence among construction firms bounced back to +7.3. It is encouraging to see the construction SBI reading back in positive territory, especially as official data show new construction orders slowing as broader uncertainty continues to supress residential and commercial property developments alike. At least some small construction firms are continuing to find work in these challenging times.

Turning next to the regions, the largest quarter-onquarter improvement in small business sentiment was recorded in Yorkshire and the North East, where the level of confidence rose 20.3 points to stand at +14.1. The North West was the only other region to record a positive confidence reading this quarter at +5.5. At the other end of the spectrum, Wales saw the steepest decline in confidence between Q2 and Q3, registering a fall of 33.8 points.

Given the broader economic landscape, it is little surprise that most regions report negative confidence figures. In Q2, GDP declined 0.2% quarter-on-quarter with services providing the only positive contribution to the headline figure. The monthly GDP estimates released since have been only marginally better.

The UK is facing a number of downside risks – Brexit negotiations, high household debt, low investment levels, to name but a few – while also operating within a challenging global environment, marked by a slowdown across Europe and continued US-China trade tensions. The UK’s small businesses have proven themselves resilient and, undoubtedly, many will continue to excel in the face of these challenges. However, this quarter’s SBI confirms that many are having to fight harder to thrive.

Nina Skero, Director and Head of Macroeconomics, Cebr

Key findings this quarter:

FSB VOICE OF SMALL BUSINESS INDEX FSB EXECUTIVE SUMMARY

• The Small Business Index now stands at -8.1 and has been in negative territory for five consecutive quarters. Year-on-year the index is down by 6 4 points and has only been lower in five quarters since 2010

• Wales saw confidence decline by 33.8 points in Q3. Confidence among Welsh businesses was the second lowest across the UK at -15 5, down from +18 3 in Q2 when Wales had the highest level of small business confidence

• Small businesses in the construction industry report a surge in confidence. A quarterly increase of 40 5 points allowed the sector to recover most of the 52 9 point fall in confidence recorded in Q2

• The exports net balance fell further to -7.1%, setting a new record low. The decline of 1 3 percentage point comes as a weaker global economy weighs on demand for British exports

• The outlook for revenue growth over the next three months is the worst recorded since Q1 2013. A net balance of just +6 5% of businesses expect their revenues to grow during the coming quarter

• Small businesses say concerns about labour costs have fallen back, relative to other pressures, in Q3. The proportion of small businesses reporting rising labour cost pressures fell by 8 1 percentage points, to 39 9% Meanwhile, fewer than one in five businesses now view labour costs as a key barrier to growth after a 15 6 percentage point fall in Q3, as other pressures have increased

• Cheaper credit is not enough to boost small business investment. The credit affordability index rose by 4 3 points in Q3, to -6 7 Despite this, a record-low proportion of small businesses (26 3%) intend to increase investment in the coming quarter

UK MACROECONOMIC OVERVIEW

Economy contracts as stockpiling effect reversed

After a first quarter in which economic growth had been boosted by stockpiling ahead of a potential nodeal Brexit, the economy contracted in Q2. In many cases, businesses that brought activity forward to earlier in the year in case of disruption to their supply chains now had excess stock and cut production in the second quarter. While Q1 saw quarter-on-quarter growth of 0.5%, this fell to -0.2% in Q2. Indeed, output in the manufacturing sector reversed all the gains made in first quarter after suffering a 2.3% decline.

More recent data suggest that, after the volatility of the first half of the year, the economy has continued to lose momentum. The ONS’ July estimate puts total gross value added across all sectors of the economy at 0.3%, raising hopes that the UK might not fall into a second consecutive quarter of decline, thereby marking a technical recession. More timely survey data, however, signals weakness across much of the economy.

One of the factors keeping the UK economy afloat is the current strength of the labour market. The unemployment rate in the UK was 3.8% in the three months to July, bringing the measure down to a 45year low. Meanwhile, the employment rate remained unchanged at a joint-record high of 76.1% in the three months to July, supported by an increase in women in employment. The annual growth rate of average weekly earnings (including bonuses) was 4.0% over the same period, reaching an 11-year high. Adjusting for inflation, annual growth in total pay was 2.1%. Increases to the national minimum wage rates in April will have had a material impact on earnings for many employees and businesses. The National Living Wage, which is the legal minimum pay for workers over the age of 25, increased by 4.9% - a change that will have affected around two million people. The good news for consumers is that annual price growth has since slowed, falling to 1.7% in August.

Despite the boost to household finances, consumers are behaving cautiously. The year-on-year growth rate of consumer credit slowed to 5.4% in August, the lowest rate since 2014. Moreover, retail sales growth over the summer has been largely disappointing. Sales volumes grew by 2.7% in the year to August 2019, a 0.7 percentage point fall compared to July, and down from 3.3% growth in same period a year earlier. Surveys suggest that it is consumer sentiment that is holding household spending back and, at 103.4, the YouGov/Cebr consumer confidence index reached its lowest level since 2013 in September. Worries over job security and household finances make paying down debt a larger priority than further spending.

A similar issue has affected the business community. The House of Commons has been deadlocked and, despite being almost exclusively focussed on Brexit, very little tangible progress towards a sustainable outcome has been made since the Article 50 deadline was extended in March. Rapid progress must be made once MPs return after the General Election. While the ongoing slowdown in trade is holding back growth globally, the lack of clarity over the terms of the UK’s future trade with the EU is having a devastating effect on investment domestically, as many businesses delay or cancel plans for expansion.

Planning for a potential no-deal Brexit has therefore distracted some firms from growing, and the level of business investment fell in Q2 2019, leaving Q1 as the only quarter of business investment growth since the end of 2017. Notably, new construction orders were down by 13.3% quarter-on-quarter in Q2, to stand at their lowest level since Q1 2013.

As businesses and consumers tighten their purse strings in the face of uncertainty, the Government’s pledge that ‘austerity is over’ could yet signal a source of growth if handled correctly. With most of the initial announcements focussed on pumping money into improving public services ahead of a likely general election, it remains to be seen how much any incoming administration is willing to commit to encouraging productivity-enhancing investment.

Figure one: Monthly growth rates by sector of the UK economy, latest three months on previous three months

Source: Office for National Statistics.

SMALL BUSINESS INDEX

Marginal growth in headline SBI as business confidence remains subdued

Confidence among small firms crept up in the third quarter of 2019 by just 0.7 points from Q2. The Small Business Index now stands at -8.1 and has been in negative territory for five consecutive quarters. Yearon-year, the index is down by 6.4 points and has only been lower in five quarters since 2010.

Other surveys also signal weaker sentiment among businesses. The Purchasing Managers Indices’ (PMI) for construction, manufacturing and services have all fallen below the 50 mark that separates expansion from contraction. In September, the construction PMI stood at 43.3, the second weakest level since 2009 when the sector was still suffering from the fallout of the global financial crisis. Meanwhile, the manufacturing PMI, standing at 48.3, pointed to a fifth successive month of contraction and the services PMI weakened again, falling 1.1 points to 49.5.

The change in sentiment likely reflects ongoing uncertainty regarding Brexit and a slowdown in the global economy. Following increased output as the result of stockpiling in the first quarter of this year, unwinding of stockpiles and an underlying slowdown in the economy have combined to produce a weaker outlook for the coming quarter, in line with SBI results.

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

1. The Small Business Index is a weighted index of the responses to the question: ‘Considering your overall business performance, and ignoring any normal seasonal variations at this time of the year, how do you view business prospects over the next three months, compared with the previous three months?’ The share of firms reporting ‘much improved’ are given the following weightings: +2, slightly improved +1, approximately the same 0, slightly worse -1 and much worse -2; the Small

Figure two: The FSB Small Business Index1: small business prospects over coming three months

Figure four: UK SBI against year-on-year UK GDP growth.

Source: ONS, FSB - Verve ‘Voice of Small Business’ Panel Survey.

Figure three: Year-on-year change in the FSB Small Business Index.

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

REGIONAL SMALL BUSINESS INDICES

Only northern regions report positive readings

CONFIDENCE SLIDES OUTSIDE OF LONDON AND THE NORTH OF ENGLAND

The largest quarter-on-quarter improvement in small business sentiment was recorded in Yorkshire and the North East this quarter, where the level of confidence rose 20.3 points to stand at +14.1 in Q3 2019. The latest quarter sees much of the 25.1 point decline between Q1 and Q2 reversed but leaves confidence in the region standing 5.5 points lower than in Q3 2018. The North West region was the only other to record a positive confidence reading: +5.5. Although confidence among businesses in London was still negative, at -10.5, the quarter-on-quarter increase of 20.1 points was second only to Yorkshire and the North East.

At the other end of the spectrum, Wales saw the steepest decline in confidence between Q2 and Q3 2019, registering a drop of 33.8 points. This led confidence among Welsh businesses to the second lowest value across the UK at -15.5, down from +18.3 in Q2 when Wales recorded the highest level of confidence among small businesses. Only the South East was home to a less confident small business population. At -20.6, the region’s businesses tumbled further into negative territory in the third quarter, falling by 12.5 points quarter-on-quarter from -8.1 in Q2.

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

Figure five: FSB Small Business Index – regional variation in small business prospects over coming three months

SMALL BUSINESS SECTOR INDICES

Consumer-facing firms squeezed

CONSTRUCTION CONFIDENCE RECOVERS GROUND AFTER Q2 COLLAPSE

Small businesses in the construction industry reported a surge in confidence in Q3, with a quarter-on-quarter increase of 40.5 points – a partial recovery from a dramatic fall of 52.9 points in Q2. The latest score of +7.3 is still down 8.7 points on Q3 2018, however, as the construction industry has faltered during 2019. The ONS reports that construction orders have slowed by 13.3% in Q2. The optimistic outlook recorded for Q3 suggests that small construction businesses are still finding ways to supplement their workload. The information and communication sector also saw confidence levels return to positive territory in Q3, rising 16.3 points to +2.9. Although the industry is one of the fastest growing in the UK economy, the rate of change has slowed, and confidence is 24.8 points lower than in Q3 2018.

Accommodation & food services and manufacturing businesses recorded large quarterly declines in confidence of 47.8 and 11.8 points respectively. Meanwhile, small businesses offering professional, scientific and technical services report little change in their confidence index, recording a marginal decline of -0.3 points in Q3 to -3.2, which marks only a 0.1 point decline year-on-year.

Figure six: FSB Small Business Index by sector – small business prospects over coming three months.

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

FINANCIAL PERFORMANCE

Firms expecting bleak future

REVENUE GROWTH OUTLOOK WEAKEST SINCE Q1 2013

The net balance of small businesses reporting growth in revenues rose in Q3 2019 to 3.1%, up from 0.1% in Q1. The proportion of small businesses that saw no change in revenues over the past three months increased by 1.7 percentage points to 26.7%, while the proportion recording a significant increase was up by a healthy 2.3 percentage points. Nevertheless, over a third of businesses recorded a weakened financial position, with 35.1% of businesses reporting some form of revenue decline, up by 3.1 percentage points on the same period last year.

The net balance was highest in Yorkshire and the North East (+14.8%) where 46.3% of businesses reported their revenues had grown during the last three months. The East of England and London saw the worst revenue performance numbers, with net balances of -6.5% and -6.7% respectively.

While the recent revenue performance numbers are marginally better in Q3, the outlook for the next three months is less optimistic than in the previous quarter. A net balance of just +6.5% of businesses expect their revenues to grow during the next three months. This is the lowest net balance recorded for this measure since Q1 2013.

Figure seven: Small business revenues, net percentage balance – proportion reporting/ expecting increase less proportion reporting/ expecting decrease.

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

Net balance of business reporting an increase in gross profit - last three months

Net balance of business expecting an increase in gross profit - next three months

EXPORTS

International sales tumble

SMALL BUSINESS EXPORTS DROP

For the second successive quarter, more small businesses reported a decline in the value of their exports than reported an increase in Q3. The net balance of exporters reporting growth fell by 1.3 percentage points to -7.1%, a decline which brings the net balance below the previous record low of -5.8%, set in the previous quarter.

By August, the value of the pound had fallen by around 4% from the start of the year. This should have presented UK exporters with an opportunity to boost exports by cutting prices in their customer’s local currency or increasing the pound value of their foreign sales. The fall in the value of international sales is therefore surprising, and suggests some clients could be changing suppliers to those based outside of the UK to avoid potential Brexit disruption.

The net balance of firms expecting an increase in exports in the next quarter stood at -4.1% in Q3. This is only the second time that the export expectations net balance has fallen into negative territory following a significant fall of 15.5 percentage points from Q2, when it stood at 11.4%. This may reflect increased concerns about potential no-deal disruption and a further escalation of US protectionism.

Figure eight: Changes in value of exports – previous three months and expectations for coming three months net percentage balance – proportion reporting increase less proportion reporting decrease.

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

COSTS AND INFLATION

Majority of firms say expenditure is up

COST INCREASES SUBSIDE AS LABOUR COST PRESSURES

FALL BACK

A net balance of 59.8% of small businesses report an increase in operating costs during the past three months compared with the same period a year ago. This is the lowest net balance recorded since Q4 2016 and marks a fall of 6.1 percentage points compared to Q2, and 5.4 percentage points compared to the same period in 2018.

Labour costs were the most frequently cited cause of rising costs for small businesses, as they have been throughout 2018 and 2019. The proportion of small businesses facing pressure from labour costs fell by 8.1 percentage points, to 39.9%. The Q2 peak in labour cost pressures may have stemmed from the implementation of higher national minimum wage rates, which businesses will have adapted to by now.

Official statistics indicate that wages are still on the rise, with annual growth in average weekly earnings (including bonuses) up to 4.0% in the three months to July. Cost pressures fell in relation to regulation, taxation and utilities, with the proportion of businesses flagging these as main causes of rising expenditure falling by 10.4, 8.4 and 6.0 percentage points respectively.

A major source of increased cost pressure was the weakness of the pound throughout the summer. The proportion of firms reporting currency value as an issue rose by 7.0 percentage points, from 14.8% to 21.8%.

Figure nine: Small businesses reporting an increase in overall cost of operation over past three months, compared with the same period a year ago; net percentage balance.

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

Figure 10: Main causes for changing business costs (firms may give multiple answers).

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

CAPACITY

Stockpiling skews output

SPARE CAPACITY REDUCED FOLLOWING Q2 SLUMP

The latest survey results show that the share of small businesses operating below capacity fell in Q3 2019. A net balance of 47.3% of firms operated below capacity in the third quarter, a 7.3 percentage point decrease compared to Q2. The high net balance in the second quarter, standing at its highest level since Q2 2016, may well have been driven by the bringing forward of activity ahead of the original Brexit deadline to Q1. As activity picked up from the weakness in Q2, more businesses will have used up some of that excess capacity.

In the third quarter, the East Midlands and North West reported the highest spare capacity net balances, at 55.9% and 51.8% respectively.

Looking ahead, the net balance of small businesses expecting to operate below capacity in the next quarter has fallen to 42.5%. This is a decline of 3.3 percentage points from the expected level of spare capacity recorded during Q2.

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

Figure 11: Net percentage balance of businesses running below capacity: proportion below capacity less proportion above capacity.

EMPLOYMENT

Hiring intentions plummet

SMALL BUSINESS APPETITE FOR FUTURE HIRES DROPS OFF

After two consecutive quarters in which the net balance of small businesses reported that their workforces reduced in size, firms made a return to increasing employment levels during Q3. Quarter-onquarter, the net balance for this measure rose by 3.4 percentage points to stand at +1.9%. This represents a decline of 0.4 percentage points since the same period in 2018.

The net balance of firms expecting to increase hiring activity over the next three months stands at 5.1%. This represents a decrease of 5.1 percentage points from last quarter. The tightness of the labour market and the slowing economy may have caused small businesses to adjust expectations regarding the pool of available labour, whist also reducing demand for more staff in some businesses.

Official estimates for the three months to July 2019 show the employment rate unchanged at the joint record high of 76.1%, while both economic inactivity and unemployment rates remained consistently low at 20.8% and 3.8% respectively. The strength of the labour market has persisted for a number of years. The ability of small businesses to attract suitable staff under these conditions means their expectations for the quarter ahead have typically undershot reality.

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

Figure 12:Net percentage balance change in number of people employed – proportion reporting increase less proportion reporting decrease.

WAGE GROWTH SLIPS BACK

In Q3 2019, the average annual rate of wage growth within small businesses slipped back to 2.0%, giving up the 0.2 percentage point gain recorded in Q2. Following fluctuations around this level, the year-onyear change also stood at -0.2 percentage points. The largest increases were recorded in the North East and Yorkshire, at 2.8%.

The expected rate of wage growth over the next 12 months is 0.1 percentage points lower than the current annual rate of growth, at 1.9%. This is a 0.1 percentage point uptick in expectations compared to the previous

quarter. Productivity growth remains weak, however, and across the economy output per hour fell by 0.2% in the year to Q1 2019. This was the third consecutive quarter in which productivity decreased. Without higher productivity growth among the workforce, pay rises will squeeze businesses margins, increasing the labour cost of each unit of output. Unless businesses can raise their prices to cover costs, then low productivity will push employers to hold back further wage growth.

Figure 13: Average salary increase awarded, this quarter versus a year before. Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

GROWTH ASPIRATIONS AND CHALLENGES

Domestic economy worries firms

SMALL BUSINESS ASPIRATIONS BOUNCE BACK

In Q3, the proportion of small businesses that aspire to grow over the course of the next 12 months rose by 8.2 percentage points to stand at 53.7%. This marks a strong turnaround from Q2, when the growth aspirations of small businesses hit a seven-year low. The proportion of firms expecting to downsize or close also hit a corresponding high in Q2, which also reversed sharply in the third quarter, falling by 6.3 percentage points to 8.8%.

Businesses in the North West and London report the strongest growth aspirations, with almost two-thirds (61.8%) of firms in both regions aspiring to grow over

the next 12 months. Meanwhile, Scottish businesses were most likely to report a desire to downsize, close or hand on their businesses, with 12.4% expecting to scale back activity in the coming year.

Given that the headline level of confidence has only shifted marginally higher for the next three months, it seems small business owners see the final quarter of 2019 as a potentially turbulent period that stands in the way of their ambitions for the longer-term.

Figure 14: Growth aspirations for next 12 months.

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

(RHS)

LACK OF DOMESTIC DEMAND WEIGHS ON SMALL FIRMS

The domestic economy continues to be the most significant perceived barrier to growth among small businesses. A 0.7 percentage point decrease from the previous quarter brought the proportion of firms citing the domestic economy as a barrier to their growth aspirations to 62.4% in Q3 2019.

Moving into second place was the issue of consumer demand. Recent survey data have shown consumer confidence reaching a six-year low, with households reducing borrowing and cutting back on spending. As uncertainty spreads, businesses are likely to notice their customers tightening the purse strings ahead of yet more potential political and economic turbulence. The proportion of respondents that considered the level of consumer demand a barrier to growth rose by 3.9 percentage points to 35.1%. This is a year-on-year increase of 2.6 percentage points, taking the figure to its highest point since Q4 2016.

The foreign economy and access to finance also saw increases in the proportion of businesses citing these as concerns, of 1.4 and 1.1 percentage points respectively. Although only 13.1% of businesses consider the foreign economy to be a major barrier to growth, as the global economy slows, exporters may find their ability to grow is hampered. Similarly, access to finance was not perceived to be a major barrier for most firms, with just 10.7% of respondents highlighting it as such in Q3, as credit remains cheap and relatively plentiful. However, the prospect of interest rate rises within the next 12 months will be a concern to smaller businesses if they intend to finance further growth.

Figure 15: Potential barriers to achieving growth aspirations – multiple answers possible. Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

CREDIT

Appetite for finance remains subdued

FEWER BUSINESSES APPLY FOR CREDIT

Figure 16: Credit applications and interest rates offered.

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey. Respondents were able to give multiple answers to this question.

Have you applied for credit in the past three months? Yes

What rate were you offered?

In the second quarter of 2019, the proportion of small businesses that applied for credit declined by 1.9 percentage points to 12.4%. Year-on-year, the proportion of firms seeking credit was down by 1.0 percentage points. The proportion of these applications that were successful (70.2%) increased

by 4.8 percentage points compared to Q2 and by 11.9 percentage points on Q3 2018. Meanwhile, the proportion of businesses that were declined credit in Q3 fell by 5.2 percentage points quarter-on-quarter to stand at 23.4%.

For those that were able to secure finance, the proportion offered low rates, less than 4%, fell 12.9 percentage points to 34.1%. Around half (50.9%) were offered a rate of less than 5%, a quarterly decline of

2.2 percentage points. At the other end of the scale, the proportion of businesses receiving offers of credit at interest rates over 11% rose by 1.1 percentage points to 13.4%.

Figure 17: Proportion of small businesses successful in their credit applications in the past three months.

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

CREDIT AVAILABILITY TUMBLES

The credit availability index fell by 6.1 points to -12.7 in Q3 2019. By contrast, the credit affordability index rose to -6.7, a 4.3 point improvement from -11.0 in Q2. The index now sits 6.8 points higher than in Q3 2018.

The Bank of England stands out among major central banks in that it has yet to loosen monetary policy in 2019, opting instead to hold fire on this front until there is more clarity over the direction of the economy after Brexit. Recently, however, members

of the Bank’s rate setting body, the Monetary Policy Committee, have discussed whether conditions may soon demand looser policy. As a number of forwardlooking indicators now indicate a weakening of the UK economy, markets have begun to more readily price in a rate cut, and this may be passing through to small businesses, making loans more affordable.

Figure 18:Indices of credit affordability/availability perceptions over time, a weighted net balance of those with negative responses subtracted from those with positive responses..

Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

INVESTMENT AND PRODUCTIVITY

Firms hold fire amid uncertainty

SMALL BUSINESSES CONTINUE TO PUT INVESTMENT PLANS ON ICE

The share of small businesses expecting to increase capital investment over the next quarter fell by 5.2 percentage points compared to Q2 2018, to stand at 26.3% in Q3 2019. Quarter-on-quarter, the proportion fell by 1.4 percentage points, putting the share of businesses intending to expand their capital investment plans at its lowest level since 2012 when the Small Business Index began recording investment intentions. Quarter-on-quarter, the share of firms intending to decrease their level of investment fell by 0.3 percentage points, to stand at 14.0%, equivalent to a year-on-year decline of 1.7 percentage points.

At 59.8%, the proportion of businesses intending to hold their investment steady is at a record high, suggesting that businesses that might have once been investing are no longer confident enough to fund further expansion. One of the most damaging aspects of Brexit has been to hold back business investment over an extended period.

Figure 19: Percentage of small businesses expecting to increase and decrease capital investment over next quarter, compared with 12 months ago. Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

FSB VOICE OF SMALL BUSINESS INDEX METHODOLOGY

This report is based on the September 2019 research survey of FSB members carried out by Verve 6,038 panel members were invited to take part in an online survey as well as through an open link shared with FSB members Reminders were sent to all non-respondents 1,274 responses were received, a response rate of 12% for the panel The data are weighted by regional gross value added to match the profile of small businesses across the UK The survey was undertaken between 5 and 18 September 2019

SUMMARY DATA TABLE

The Small Business Index weights strong responses (much improved or much deteriorated conditions) double and subtracts the weighted proportion of firms reporting deterioration in business prospects over the coming three months from the weighted proportion expecting an improvement.

The Employment and Revenue indicators are net percentage balances, with the proportion of firms reporting a decrease subtracted from the proportion reporting an increase.

Responses are also weighted according to regional gross value added.