Small Business Index, Quarter 2, 2015

Growth aspirations of small businesses are strong and continue to grow

plan to grow over the next year 65.3%

31.9% of firms plan to increase investment in capital in the next 12 months

Small firms seeing rapidly rising year-on-year productivity

RECORD HIGH PROFITS SKILLED STAFF

Net balance of profit and revenue growth continue to rise

• 24.1% in revenues

• 17.4% in gross profit

Firms concern over availability of skilled workers increases

John Allan, FSB National Chairman

FSB Voice of Small Business Index

Our latest FSB Small Business Index (SBI) shows strong levels of confidence amongst FSB members, with a clear recovery from the seasonal low of 2014 Q4, to +37.9. Encouragingly this momentum looks set to continue with nearly two thirds of members looking to grow either moderately or rapidly over the next year – a high since our surveys started. That optimisim is reflected in the record high number of firms (+31.9%) who intend to increase capital investment in their businesses over the next 12 months - good news for an economic recovery based on investment not just consumption. Further encouragement is provided by strong indications that plans for job creation will remain strong. Enabled by supportive government initiatives, our members are also increasing UK exports with more small businesses exporting goods or services overseas.

Looking at specific sectors, confidence was highest in business and financial services, transportation and storage, with a lower level of optimism in manufacturing and construction. The positive levels of confidence were underpinned by more firms than ever reporting increases in their revenue and profit, and having expectations of further increases over the next quarter. Businesses have also benefited from a drop in the cost of utilities and fuel keeping input costs lower than a year ago, as well as the Bank of England deferring a rise in the interest rate as the UK slipped into deflation.

However, the benefits of these welcome conditions were not felt by all our members. Lower confidence ratings from some of the regions, notably Wales, underlines the need to press ahead with investment in transport and digital infrastructure. This will improve connectivity with markets across all countries and regions, support growth and thereby help rebalance the economy. The skill shortages remains an ongoing concern, and has been a persistent feature of the UK’s labour market for too long. Having appropriately skilled workers and students who are ready for the world of work is fundamental to the growth of businesses. In that regard it is becoming ever more crucial that the Government delivers on its apprenticeship reforms, ensuring that quality is not compromised as it strives to achieve its target of three million new apprentices.

Improving access to finance has long been an issue we have campaigned on, and it is good news that conditions are easing year-on-year. Small business who are seeking to grow have reported they are less concerned about finance being a barrier, despite a slight dip in the approval of bank loan applications being approved and a reported increase in the cost of credit. To help businesses of all sizes get the finance they need, the FSB is advocating for greater diversity of choice and long-term support for the British Business Bank to broaden the alternative finance market. The Government should therefore continue with its reform agenda, taking forward proposals to share credit data and to create referral platforms for those declined facilities by their banks, and to encourage new participants to the market by keeping barriers to entry low.

To maintain the positive momentum small businesses are providing to the economic recovery, we now look forward to the Chancellor’s Emergency Budget to lockin these high levels of confidence. That begins with the commitment to fiscal discipline and reducing the budget deficit, and to set the stage for the delivery of existing reforms and the Manifesto commitments. As our submission to the Chancellor prior to the Budget made clear, we believe a focus on productivity should take centre stage to address the UK’s poor record on this front. This will take a sustained effort. Top of our wishlist are long-term plans for investment in infrastructure, particularly to deliver the vision of a Northern Powerhouse; setting out a roadmap to tangible tax simplification, that both reduces administrative burdens and better promotes productivityboosting investment by businesses; continued efforts to improve access to finance and export opportunities; and investing in skills, including our leadership and management skills, so our companies have the workforce to become more successful on the world stage.

Economist’s View

The latest FSB SBI findings give much cause for optimism and suggest that the UK’s small business population will be instrumental in supporting economic growth this year. Confidence among small firms appears now to be stabilising year-on-year at a level that is well into positive territory, highlighting favourable market conditions. In addition, rising turnovers and headcounts are being reported by a larger share of small companies, while profit growth is being lifted by the low-inflation environment. A particularly encouraging sign emerging this quarter is in the trend for investment among small businesses. A slow pace of investment growth has been a weak spot of the recovery so far, which is largely consumer-driven. However, the proportion of small businesses expecting to increase capital investment in the next 12 months has picked up to its highest on record. Small companies are aiming higher, with more aspiring to growth over the year ahead, and credit conditions appear to be improving. These factors are important, as strong investment with positive knock-on effects on worker productivity is a key feature of a sustainable economic growth path. UK expansion in recent years has been boosted largely by consumer spending funded by using savings and debt which, although useful in the short term to keep growth ticking over, cannot be sustained forever.

Other findings from the latest SBI suggest that spare capacity is continuing to fall back as demand picks up further, highlighting the need to invest. With slack in the economy falling back, the Bank of England will need to start raising the base rate once the deflationary effect of the sharp drop in the global price of oil drops out of the annual inflation measure. A tighter labour market will be another factor contributing to a rate rise, as the skills shortage start to push up wage growth later this year and into 2016. Cebr expects the first increase in the rate to come early next year, to prevent inflation from rising in the medium term above the Bank’s target of 2%. However, one cause for concern highlighted by this quarter’s findings is the ongoing economic weakness of some parts of the UK. In particular, the fact that small firms in Wales now have the lowest confidence of anywhere in Britain comes on the back of other discouraging data. Employment is falling back year-on-year in Wales, the only part of the UK where this is the case, while output in the Welsh construction and production industries is well down on the previous 12 months. With further public sector job cuts ahead likely to impact Wales more sharply than other parts of the UK, pressure will be on the private sector to pick up the slack.

Rob Harbron, Senior Economist, Cebr

Executive summary

Key findings this quarter:

• The Small Business Index recorded another quarterly rise to stand at +37.9. It is marginally down compared to the same quarter a year ago, but remains at robust levels.

• The highest number of firms ever reported performance as “much improved” over the past three months. This response was given by 11.1% of firms surveyed.

• Confidence among small firms in the devolved nations remains lower than in England. Scotland and Wales have the lowest confidence readings, while the South of England and the Midlands are at the top end of the spectrum.

• The results for revenues and profits are at their highest so far. A net balance of +24.1% of firms reported revenues were higher over the past three months than during the same period a year ago, while a net balance of +17.4% reported the same for profits.

• The balance of exporters reporting higher export values has risen. From 3.1% last year, this edition found that 6.1% of firms exporting have experienced a rise in their export values.

• Investment intentions recorded their highest level in the history of the index. A net balance of +31.9% of firms plan to increase investment in capital equipment over the next 12 months, a record figure.

• Spare capacity has shrunk further over the past three months. The majority of firms are still operating “below capacity”, but this has fallen to the smallest majority yet and small businesses expect it to shrink further next quarter.

·• Firms’ workforces have grown. A net balance of +8.9% of firms, another record figure, report having increased employment over the past three months.

• Small business aspirations are also at their highest level observed so far. A total of 65.3% of surveyed firms are planning to grow moderately or rapidly over the next year.

• Small business productivity continues to grow. Whole economy output per hour rose only around 0.3% year-on-year during Q4 2014, whereas it rose around 1.4% amongst small businesses over the same period.

• Firms reported an improvement in credit conditions overall. Although more reported being turned down for loans than last quarter and the interest rate reported rose, firms rate credit as both more affordable and more available than ever before.

UK macroeconomic overview

Growth expected to accelerate from weaker than expected Q1 reading, but challenges remain

The latest GDP data showed that the UK economic growth moderated from 0.6% during Q4 2014 to 0.3% during Q1 2015, the slowest quarterly figure since 2012. Cebr expects a moderate slowdown over 2015 as a whole following 2014’s strong performance. The overall picture is one of an imbalanced recovery, but certain obstacles will need to be negotiated to ensure it continues.

The largest contributor to the fall in the growth rate came from net trade. Exports fell back, partly due to the strong pound and weak economic expansion in the Eurozone, while imports saw a significant boost from domestic demand. Exporters would also do well to focus more on overseas economies outside the Eurozone, as the UK is very vulnerable to a slowdown due to its high proportion of exports to that market. Encouragingly, this quarter’s SBI shows exporters increasing their volumes of overseas sales.

The other imbalance in the UK recovery is between consumer spending and business investment. The latter is critical in order to increase wages; to increase their productivity, which is struggling to recover after the Great Recession (Figure 1). Workers in British firms require better equipment and training. This is the only way to increase earnings in the medium term, as firms cannot raise wages unless revenues rise. Since the crisis, the economy has invested less than required and as a consequence productivity is still below where it was in 2008 and even

below its 2011 level. The recovery has been driven by consumer spending; however, if households spend more without their wages keeping pace, they will take on more debt which makes for an unsustainable recovery. Recently, consumer spending has been supported by the falling price of essentials, but that can only last for so long. However, the Q1 GDP figures showed some hope for investment, as it rose 1.7% during the quarter. This is echoed by findings in the SBI: the majority of small firms have been reporting plans to increase investment for some time, but in the latest survey this majority has grown. This has fed through to a rising trend in the productivity growth rate in small businesses, according to this quarter’s SBI.

Finally, public sector spending is set to fall over the next Parliament. The Government has yet to specify exactly how and where it will make cuts, apart from citing the welfare bill. Wherever these cuts fall, they will produce some drag on GDP.

These point to a series of challenges for maintaining growth over the remainder of 2015. There are signs of improvement in key weaknesses in the latest index and most results point to a strengthening business environment. Small businesses are generally optimistic and should help to support growth, although many see the domestic economy as the biggest potential danger.

1: UK productivity, Q1 2008=100

Figure

Small Business Index

Confidence firmly positive and on an upward trend?

The SBI has risen for the second successive quarter to +37.9. It stands 1.8 points below its level at the same time last year, but still indicates that a large majority of firms are expecting business performance to improve rather than deteriorate – in fact, it is close to its highest ever reading. This points to a stabilisation of confidence around the high levels seen towards the latter half of 2014. Of note is the proportion of firms reporting that performance is “much improved” over the past three months: this is at 11.1%, its highest level over the entire history of the index.

This quarter’s marginal year-on-year fall in the SBI comes after two periods of more significant annual declines, which further suggests that confidence is being sustained at a high level. Although the Office for National Statistics (ONS) estimate that GDP growth in Q1 2015 slowed sharply from previous quarters, these latest readings from small businesses suggest that more buoyant growth rates will be seen across the remainder of 2015.

Figure 2: The FSB SBI1: small business prospects over coming three months

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

Figure 3: Year-on-year change in the FSB SBI

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

Regional Small Business Indices

London, South East and West Midland regions exhibit most confidence

Figure 4: FSB SBI – regional variation in small business prospects over coming three months

Confidence in devolved nations trailing behind south of England and the Midlands

The South East has moved to the top of the UK table, a position from which it has rarely strayed far from over the history of this index. Confidence also increased in the Midlands and North West. Recent political debate has focused on imbalances within the British economy. Specifically, the North–South divide has been addressed with the Chancellor referring to plans for a “Northern Powerhouse”, where large Northern cities would see higher growth rates underpinned by government infrastructure investment. Plans for devolution of powers to Northern cities would aid this process. The North West has seen a sharp rise of 11 percentage points between a year ago and the present, suggesting that a degree of rebalancing is underway.

The latest SBI results also highlight how confidence remains low among the devolved nations, with Wales and Scotland at the bottom end of the spectrum. Scotland’s

optimism reading among small firms is likely being influenced by a number of factors introducing uncertainty into the business environment, including the radical change in Scotland’s political map since the election and the high probability of constitutional reform in the medium term. In addition, the sharp fall in the price of oil over the past year is likely weighing on the oil extraction and support industries. Confidence in Wales meanwhile is more likely to have been affected by ongoing difficult conditions in the local economy. Wales is the only part of the UK where employment levels have fallen over the past year, due to a combination of public sector job losses and a weak private sector. This economic weakness is further illustrated by the current state of the production and construction sectors in Wales, both of which have seen significant declines in output over the past year.

Sector Small Business Indices

Confidence among service firms is higher among small businesses

Business services remain at top of sector rankings

Small businesses in the administrative and support service sector are now the most confident of all those surveyed. This broadly refers to business services2, while financial services follow closely. Both show a significant gain in confidence compared to the same period a year ago. While manufacturing confidence is holding up, it is hampered at present by a strong pound, as it exports more of its output than construction and services. The results of this survey confirm that confidence among service firms is higher among small businesses as well, and it also demonstrates that finance, business and transportation are the most optimistic of the service subsectors.

Real estate businesses report lower confidence than during the same period a year ago. However, compared to the latest quarter, this sector has seen a strong pickup: the net balance of firms expecting conditions to improve has risen from -13%, the lowest reading of any sector during Q1, to +48%. This has occurred alongside rises in the number of people who have been approved mortgages, according to the British Banking Association: a downward trend in this indicator was reversed at the beginning of 2015. In addition, the latest house price index from the ONS shows an acceleration in growth, after a moderation in its pace shown towards the end of 2014. Continuing strong demand in the real estate sector, aided by new government policies to encourage buyers, is likely to continue pushing up prices and consequently real estate confidence should remain high.

Retail services (an important part of wholesale, retail and motor vehicle repair) have experienced a sharp fall in confidence over the last 12 months. While retail sales have been increasing at around 4–5% year-on-year for most of the past year, many major retailers have been unable to translate this into rising profits. An aggressive price war has harmed major supermarkets and as these businesses have a strong presence across many subsectors within retail, the entire sector has had to cut its costs and accept lower profits. Essentials such as food and energy continued to fall in price over the first quarter due to weak global demand. This led to consumers buying ever higher volumes, but growth in values has been slow (closer to 2–3%) and on a downward trend since early 2014.

Accommodation and food service activities

Wholesale and retail trade; repair of motor vehicles

Education

Real estate activities

Human

Arts,

Professional,

Construction

Other

Figure 5: Figure 5: FSB Small Business Index by sector – small business prospects over coming three months

Source: FSB- Verve ‘Voice of Small Business’ Survey *Note: the classification of sectors now uses the Standard Industrial Classification 2007 (SIC07) This changes the grouping such that some sectors have no exact equivalent from Q2 2014 Some sectors have been replaced by a close substitute, or the reading combines multiple sectors into one, in which case we use the average of the Q2 readings

Revenue and profitability

Almost as many firms expect profits to improve as expect revenues to improve

Q2 2015 records highest net balance of firms reporting profit and revenue growth

The upward trajectory in both turnover and profits growth for small businesses has continued this quarter. A net balance of 17.4% of firms report that profits have grown over the last three months, while a balance of 24.1% of firms surveyed say that their revenue has increased. Both of these readings are the highest recorded so far by the SBI.

Firms are bullish regarding prospects for the next three months. A net balance of +32.1% expect to see their revenue increasing further, while +28% report the same for profits. As well as sustaining the upward trend that both indicators display, the results for these questions

during the current quarter show that the gap between the revenue and the profits performance continues to narrow. In other words, almost as many firms expect profits to improve as expect revenues to improve. This reflects the benign environment in terms of cost that many firms are experiencing – while revenues are improving as the economy continues to expand, costs are not growing as quickly because inflation for businesses is currently very low and wage growth is moderate. Together that explains why the upward trajectory in profits has been steeper than that for revenues in recent quarters.

Figure 6: Small business revenue growth and gross profit, net percentage balance – share reporting increase less share reporting decrease

Revenue, previous three months Revenue, coming three months Gross profit, previous three months

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

profit, coming three months

Exports

Firms in London and East England most likely to export their products

Exporters see higher sales

Among firms who sell in overseas markets, the proportion reporting increases in exports has picked up. The US saw a surge in imports over the first quarter, which is likely to continue as growth in the world’s largest economy remains rapid and the strong dollar makes imports cheap. Firms are optimistic about next quarter’s export performance, a net balance of +20.7% expecting values to grow. Improving consumer and business confidence in the Eurozone is likely to contribute to a rise in sales to that market in the near future.

This quarter has also seen early signs of an increase in the proportion of small businesses exporting. After hovering around 25% over the history of the survey (with only the most gentle of upward trends), now 28.6% of small businesses report that they export goods or services to foreign markets. However such a sharp increase in one

quarter should be treated with caution until it is sustained. It is set against a backdrop where policymakers are currently having difficulty in increasing the UK’s share of exports in overall spending, with economic growth relying instead on domestic consumers. Total exports stood relatively still between 2012 and 2014 at around £500 billion, just half of the government’s target of £1 trillion by 2020. But for small businesses, this quarter’s uptick is a sign of progress. Firms in London are the most likely to export their products, with 47.5% doing so. Firms in the East of England also have a high propensity to export, at 30.4%. At the other end of the scale, only 19% of small firms in the devolved nations of Scotland and Wales export, while in the East Midlands and the North East just 16% and 10% respectively.

Figure 7: Changes in exports –previous three months and expectations for coming three months; net percentage balance, share reporting increase less share reporting decrease

Costs and inflation

Most firms indicate that labour costs make the largest contribution

Cost pressures increase, though remain low by historic standards

The net balance of firms reporting increases in cost has risen slightly on last quarter, to 48.9%. This still leaves the percentage lower than the equivalent a year ago, when 54.2% of respondents said input costs were growing. The pattern is in line with disinflationary pressures in the economy as a whole. These are not as evident as they were around January and February 2015, but cost pressures are still weak by historical standards.

Most firms indicate that labour costs make the largest contribution of all factors. Labour costs are nevertheless less of a concern than they were a year ago, or indeed at any time since Q1 2014. Wage pressures have remained weak despite the strong recovery in the labour market that has taken place since mid-2013, the SBI finds that they do not, in general, expect the pace of growth to pick up substantially during this year from its current level of around 2%.

The largest changes in contributing factors compared to a year ago relate to fuel and utilities. Most firms responded that these were important drivers in reducing costs. The price of oil has rallied since its lows in January, but it remains at levels similar to those in 2009 at just over $60/barrel for the Brent crude benchmark. This has been a great boost to firms’ bottom lines. A surprising upward movement in reported cost changes is in the exchange rate. Sterling has held strong or even risen recently versus most other major currencies. Many major central banks around the world have lowered their interest rates or loosened monetary policy through other means in order to make their currencies less valuable and their exports competitive, while the Bank of England has not. However, the pound has lost around 10% of its value against the dollar over the past year and as certain commodities, notably oil, are priced in dollars, this tends to push prices higher than would otherwise be the case.

Figure 8: Small businesses reporting an increase in overall cost of operation; net percentage balance

Figure 9: Main causes for changing business costs (firms may give multiple answers)

Capacity

Expectations are that the trend will continue on its downward path over the next three month

Figure 10:

Net percentage balance of businesses running below capacity – share below capacity less share above capacity

Businesses expect further spare capacity reductions ahead

The net balance of firms surveyed reported spare capacity has fallen from +47.7% a year ago to +40.7% in the current quarter. This represents the lowest proportion on record for this question, meaning firms’ labour forces and other productive resources are the closest to being fully occupied since the series began in 2010. While encouraging, the data shows that the majority of firms are still running below capacity. The Bank of England, which estimates spare capacity in its efforts to monitor inflationary pressures, judges that there has been little intensification of capacity pressures across the economy as a whole.3 This assessment is one factor influencing its current policy of keeping the Bank rate constant at 0.5%. It adds that since the financial crisis, firms may

have become used to operating with a little more slack than usual. This corroborates the pattern visible in Figure 10: spare capacity is falling away, but the slow pace of this trend means that 54% of firms are still running below capacity while only 13.3% report running above capacity.

Expectations are that the trend will continue on its downward path over the next three month. A net balance of +33.3% of firms expect to be running below capacity over the next three months. A continuation of the trend would mean more efficient use of firms’ capital and workforces, potentially leading to an uptick in productivity.

Employment

A net balance of +14 2% of firms expect to take on more employees over the next three months

Figure 11:

Net percentage balance change in number of people employed – share reporting increase less share reporting decrease

Small businesses continue to create jobs at a strong rate

The net balance of small businesses reporting that employment in their firms has increased has risen to 8.9%, comfortably above last year’s 2% and the highest figure on record for this question. This chimes with the continuing expansion in the labour force and the decline in the unemployment rate, latest recorded at 5.5% during the January–March 2015 period, close to precrisis levels. Unemployment is an important component of spare capacity across the economy as a whole, and its decline is in line with the downward trend observed in businesses’ spare capacity.

However, there is considerable regional variation, reflecting divergent health in labour markets across the UK. For the North East and Wales, the balances reporting hiring more staff were negative, while +17.5% and

+19.5% of firms increased headcounts in Yorkshire and the Humber and Scotland respectively. For the North East and Wales, these trends are worrying as they have the UK’s two highest regional unemployment rates already. A net balance of +14.2% of firms expect to take on more employees over the next three months. The headline figure masks important regional variation in hiring intentions: the only part of the UK where businesses plan to reduce headcounts is in Wales, where the net balance is at -2.8%. This poses particular difficulties, Wales being the only area in the country where total employment has fallen over the past year. On the other hand, in the East Midlands a net balance of +20.6% of businesses replied that they would increase headcounts.

change, last three months

employment change, next three months

Highest wage growth figure since SBI began

The sector raising wages by the most was financial services: firms reported salaries were higher by 3.4%, in line with the high level of confidence recorded in this part of the economy.

The average wage increase across all small businesses’ workforces was 1.9%. While modest by historical standards, nonetheless this is the highest figure for wage growth ever recorded by this survey, and brings it in line with the rate of wage growth in the economy overall, which has been around 2% in recent months. A rise is anticipated over the next year: firms expect to be paying staff 2.2% more than they are at present.

The sector raising wages by the most was financial services: firms reported salaries were higher by 3.4%,

in line with the high level of confidence recorded in this part of the economy. Wages tend to rise fastest in those occupations where skills are in shortage, because the relative lack of competition gives workers more bargaining power to ask for increases. As more workers enter employment, more sectors experience shortages and so rising wages. Salaries in construction – recently mentioned by the Bank of England as a sector in which skills shortages were apparent – rose by a healthy 3.1%. The Bank also mentioned healthcare, where wages are now 2.7% higher than last year. A degree of pay restraint is evident in education – with teachers’ pay rises capped at just 1% in the public sector, wages in private firms operating in the sector can rise relatively slowly while remaining competitive.

Figure 12: Average salary increase awarded this quarter versus a year before

Productivity

Small business productivity is rising faster than productivity in the economy as a whole

Productivity growth on a rising trajectory

Among small businesses, productivity appears to be rising at a relatively rapid rate. This indicator tracks the change in inflation-adjusted turnover per worker across all businesses surveyed, which allows us to calculate changes in productivity.

Since the beginning of 2014, small businesses have reported inflation-adjusted turnover to be rising at a higher rate than employment, and the gap has been growing. As a result, productivity growth has risen since early 2014, having been in negative territory prior to that. This suggests small business productivity is rising faster than productivity in the economy as a whole. Whole-economy output per hour rose only around 0.3% compared to a year ago, whereas it rose around 1.4%

on the small business metric, boosted by the significant share of firms reporting revenue growth, as highlighted in Figure 6 earlier.

This is an encouraging trend, particularly after the years of falling productivity among small businesses illustrated by Figure 13 below. Britain has long suffered from lower productivity that many of its European and G7 counterparts. While a substantial change in this position will require time and co-ordinated effort from businesses and government, these latest results suggest that among small businesses at least, some progress is being made. This is important as productivity growth is a key component of increases in spending power and standards of living over the longer term.

Figure 13: Small business productivity and year-on-year change (inflation adjusted turnover per employee)

Growth aspirations and challenges

This optimistic picture of small businesses suggests that they will contribute to growth over the remainder of 2015

Aspirations for growth are strong

This quarter has seen a return to growth for firms’ aspirations. The percentage planning to grow moderately or rapidly has surpassed to an all-time high to reach 65.3%, and the proportion intending to downsize, close or hand on the business has fallen to its lowest value so far. Official statistics support the picture of a gradual downward trend in businesses closing, with the latest insolvency statistics showing that company insolvencies between January and March 2015 stood at their lowest level since Q4 2007. This optimistic picture of small businesses suggests that they will contribute to growth over the remainder of 2015. As a relatively large proportion of the economy, this will be necessary if the UK is to maintain growth over 2015 at a rate similar to that in 2014 – a task which is certainly possible but faces a number of obstacles such as a strong pound and shortages of key skills.

The turnaround from last quarter, which saw headwinds from a less-confident global economy dent British firms’ confidence, is particularly marked, with a four-point jump in the proportion planning to grow. This chimes with the headline results of the SBI suggesting that slight concerns over the recovery have subsided. Firms continue to mention these issues as potential concerns (see Figure 15) but appear to treat them as downside risks rather than their central expectations.

Figure 14: Growth aspirations for next 12 months

Domestic economy remains front of firms’ minds

The domestic economy, consumer demand and skills top the list of what firms’ see as potential barriers to achieving growth. Despite the generally positive picture in this report, it concerns firms more now than it did last year. Overall, firms report strongly rising revenues and have markedly more positive aspirations, suggesting that consumer demand is sufficient. However, uncertainty over the UK’s future economic performance remains. The halving of the GDP growth rate, from 0.6% during Q4 2014 to 0.3% recorded during Q1 2015 testifies to this. The economic recovery has so far relied heavily on household spending, encouraged by wages going further as prices have decreased. However, wages are influenced by productivity which over the economy as a whole, has seen very poor levels of growth since the financial crisis (small businesses’ performance appears better – see section on Productivity). Firms are also slightly more concerned about the foreign economy and links to the eurozone. This could create further uncertainty, with businesseses delaying investment plans, with knock-on

consequences on their suppliers. The higher proportion of “Other” responses below may capture some of these uncertainties.

Firms remain concerned by the cost and availability of skilled workers, a feature picked up in previous reports. The sectors that are subject to skills shortages such as construction and healthcare (see section on Employment) are understandably seeing rising wages, which weighs on small businesses’ profits. However, this is partially offset by the sharp reduction in the proportion of firms citing fuel costs and other inputs as a potential barrier to growth. Business rates have also undergone reforms in the December 2014 Autumn Statement: the inflationlinked multiplier (which determines the rateable value of the property) was capped at 2%, while business rate relief of 100% for the smallest businesses was extended. Firms may recognise the benefits of the employment allowance and its impact on the employer mix.Together these factors are likely to have lightened the tax burden on small businesses, evident from Figure 15.

Credit

Credit affordability and availability have both reached their highest levels since the SBI started

16:

Fewer firms cite access to finance as a concern

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

The proportion of firms applying for credit stood at 15% this quarter. While this was lower than last quarter’s 17% it is generally in line with results over the past year. Although slightly fewer (3%) of the firms that applied for credit this quarter were successful than in Q1, the general

trend over the past couple of years has been positive and the share of successful applicants was up 10% to 54% compared with just 44% in the first half of 2012. Again, this potentially points to firmer financial footings among small businesses. However, as one might expect,

Figure

the odds of being approved for credit are still skewed towards the larger end of the small business population: 45.8% of sole traders who applied for credit were approved, while 63.3% of small businesses with over 50 employees were successful.

Most small firms continue to be offered the interest rate of around 4%, though more are now being offered higher rates than a year ago.

Figure 17: Proportion of small businesses successful in bank credit (e g loan or overdraft) applications in the past three months

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

Credit affordability and availability return to positive trend

Credit affordability and availability have both reached their highest levels since the SBI started to survey firms on these items. A weighted net balance of -14.5% of firms rated credit for small businesses as affordable, whereas a weighted balance of -25.3% of firms considered it to be available. Firms report affordability to be skewed towards larger firms. Of those with fewer than 10 employees, more firms rate credit for small businesses as unaffordable rather than affordable. The response to this question is reversed for small firms with more than 20 employees. These latest trend findings are positive and tie in with the generally rising share of small businesses successfully applying for credit. With more small firms increasing their capital investment intentions, it is important that the

right finance is available to help fund these plans for growth. While many businesses will continue to rely on traditional lenders such as banks, other routes to finance such as peer-to-business lending and crowdfunding are also swiftly emerging. These may potentially ease the availability and affordability of credit. In addition, with rising profits reported by many firms, funding expansion through retained profit is now a further avenue for more businesses.

Investment

A highly encouraging +31 9% of firms responded that they plan to increase capital investment over the next 12 months - the largest net balance yet

Figure 19: Net percentage balance in anticipated capital investment growth over next 12 months – share reporting increase less share reporting decrease

Highest-ever net balance of firms planning to invest

The net balance of small businesses planning to invest has returned to the rising trend it held in Q1 2015. A highly encouraging +31.9% of firms responded that they plan to increase capital investment over the next 12 months - the largest net balance yet.

This tallies with the national picture from official statistics. Fixed capital formation by businesses grew slowly during Q3 2014 and fell during Q4 2014. However, it registered a marked pickup during Q1 2015, growing by 1.7%. Low growth in investment has been a notable weak spot in the consumer-driven recovery. Business investment is crucial to sustain balanced growth, as it

is a key route to increasing workers’ productivity and ultimately, household incomes and spending. The increased investment registered in the national figures as well as the SBI will aid the sustainability of the recovery.

As such, the sustained rise in capital investment intentions among small firms is likely to be one factor helping to drive the stronger productivity figures (illustrated earlier in Figure 13). With investment intentions rising further this quarter, continued positive productivity figures are likely to emerge in the quarters ahead.

Method

This report is based on the May 2015 research survey of FSB members carried out by Verve All panel members (5,492) were invited to take part in an online survey Reminders were sent to all non-respondents 1,415 responses were received, a response rate of 26% The data is weighted by regional gross value added to match the profile of small businesses across the UK and this accounts for the slight variation in results from previous FSB ‘Voice of Small Business’ panel surveys The survey was undertaken between 30th April and 19th May 2015

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.

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