Small Business Index, Quarter 2, 2021

43% say they are pushing up operating costs

New trading rules continue to disrupt

Concern about skills hits six-year high

37%

say lack of the right staff is holding them back

FSB FOREWORD

The second quarter of 2021 had its ups and downs for small businesses, with good news about falling Covid hospitalisations countered by a postponement of full reopening in England, without an accompanying extension to business relief measures, and Covid app pings hampering access to staff. Small firms in Wales, Scotland and Northern Ireland also faced uncertainty on the timings of restrictions easing.

While small business confidence growth has slowed down since the last quarter, it has held up to a considerable degree, down to the greater certainty provided by the Government’s roadmap out of lockdown. Respondents are more bullish about their profit expectations than they were six months ago, and indeed this time in 2020.

But it isn’t plain sailing, with the proportion saying that the cost of running their business is higher than it was last year jumping sharply. Rising input costs are a particular area of concern, with many small businesses acutely exposed to fluctuations which eat into their already-eroded profit margins. This increase plays into the prospects of higher inflation, which could hamper a forecast recovery.

More small businesses are raising a lack of appropriately skilled staff as a barrier to growth than in previous quarters. Ensuring that small businesses can access the right level of skills, especially in high-growth sectors and industries essential to the functioning of the economy, should be a key priority for the Government. New initiatives around apprenticeships, traineeships, T-level placements and Kickstart should be expanded to have a greater impact.

The quarter covered in this report saw businesses still benefiting from some pandemic-related support schemes, with rises in employers’ contributions for furloughed staff and deferred VAT repayments kicking in only at the start of Q3.

The extension of the moratorium on commercial evictions for businesses hit by the pandemic until March 2022, and the announcement that the restrictions on issuing statutory demands will remain in place until the end of September, were twin pieces of good news for many small businesses. Easy measures for the Government to sign off, of course, as they do not require contributions from the public purse.

Thousands of companies which took out state-backed loans started making their first repayments in May. Almost two in five SBI respondents who have some

form of debt view it as unmanageable, while small businesses’ view of the affordability of new credit has deteriorated since the last survey. We’re urging Bounce Back Loan providers to make all relevant customers aware of their Pay As You Grow Options and encouraging the Government to look again at our emergency debt for employee equity model. One perennial concern is the late payment crisis, which has worsened through the epidemic. The damage poor payment practices cause to small businesses is both enormous and unnecessary. It is completely unjustifiable for customers to delay payments, effectively using small suppliers as free credit lines.

FSB is calling for companies’ payment practices to be made more visible at board level, with accountability processes in place to ensure that the issue is taken seriously at the very top of big corporates. We look forward to working with the new Small Business Commissioner on this front.

Looking ahead, there are many reasons to be optimistic. If hospitality, accommodation and independent retail businesses are able to remain open in the face of fears about staff being pinged, the ‘staycation summer’ should spur recovery in many areas, especially coastal towns where a good summer is vital for local economies.

There are possible clouds on the horizon, from the threat of a new strain of Covid taking hold, to issues around Covid passports, to the levels of debt which many small businesses were forced to take on in order to survive, and which may now hamper their efforts to rebuild.

As we work towards recovery, we hope that the UK Government will honour its manifesto pledge to be a pro-small business administration. We hope too that it realises the centrality of small businesses and the self-employed to its levellingup agenda: whether it’s streamlining and improving business support to drive productivity, or creating new jobs in local communities, ministers will need to think small first to succeed.

While the resilience and adaptability of small firms are there for all to see, the Government still has a critical role to play in supporting them, to the overall benefit of our economy and future prosperity.

Martin McTague, Chairman, Policy and Advocacy

Mike Cherry, National Chairman

ECONOMIST’S VIEW

After last quarter’s dramatic bounce back, small business confidence moderated slightly in the second quarter of the year. The FSB Small Business Index (SBI) fell by 8.7 points to 18.6 in Q2, which is still the third-highest level since Q4 2015. Given that the mood among businesses in the previous round of the SBI was positively exuberant, the small decrease in this quarter’s index should not be exaggerated. Indeed, the very solid performance in this quarter shows that the majority of businesses look optimistically toward the near future and will aim to make the most of the opportunities lying ahead.

Over the second quarter, the UK has continued successfully with its vaccination drive, enabling the country to largely stick to the scheduled easing of restrictions laid out earlier in the year. However, the final step of removing all Covid restrictions in England was eventually pushed back by a month as it became clear that the Delta variant of the virus, which had become the predominant strain over Q2, was spreading rapidly, again driving up infection numbers. In terms of the impact on economic activity, lifting restrictions on non-essential retail businesses in April and the staggered re-opening of hospitality have given GDP growth a boost at the start of the second quarter. In line with this, the accommodation and food services sector recorded both the largest quarterly increase on the SBI, of 46.4 points, as well as the highest overall reading in Q2 at 61.4. After months of either complete closure or operating with severely reduced capacity, restaurants, pubs and bars welcomed the opportunity to serve customers, who made the most of their re-found freedoms to dine and drink out. The arts, entertainment and recreation sector reported the second-highest SBI reading this quarter at 28.9, with the industry clearly hoping to stage a similar comeback to the food and drink services sector following the final lifting of restrictions on 19th July.

However, despite these largely positive trends, there are a number of issues that the UK’s SMEs

had to grapple with over the past quarter. While the vaccination campaign has been largely successful, with more than 50% of the UK population having received two shots of a vaccine by mid-July, it is still premature to claim victory over the pandemic. High levels of community transmission mean that consumers still exercise a certain level of restraint, especially with regards to larger crowds indoors. Moreover, the ‘pingdemic’ has shown that the pandemic is still able to disrupt businesses, as many SMEs are reporting problems with staffing due to workers being prompted to isolate at home after being in contact with an infectious person.

The regional performances on the SBI show that these impacts are experienced to varying degrees in different parts of the country. Notable are the sharp falls in small business confidence in the East of England, the North West, the West Midlands and London. However, all of these regions still report positive SBI scores with the exception of London, which saw its score drop to -0.9. Meanwhile, the East Midlands remains the region with the highest SBI score at 50.0 in Q2, unchanged from the previous quarter.

With the economic recovery underway, the focus in the coming months shifts to new challenges. On the policy front, the end of the furlough scheme looms and although the number of people on the scheme has fallen continuously over the past months, we expect a significant increase in unemployment in Q4. Businesses also have to grapple with rising prices for raw materials and partial labour shortages, which have been amplified most recently by more than half million people a week getting ‘pinged’ and asked to self-isolate. As government support is withdrawn and demand conditions start to normalise over the second half of the year, the UK’s small businesses will undoubtedly play an important part in leading the economy towards the post-pandemic new normal.

Kay Daniel Neufeld, Head of Macroeconomics, Cebr

FSB EXECUTIVE SUMMARY

Key findings this quarter:

The Small Business Index (SBI) slipped by 8.7 points between Q1 2021 and Q2 2021, reaching 18.6. This marks the first time the Index has exhibited positive values in consecutive quarters since Q2 2018.

• With the exception of London, unanimous positivity on the SBI was observed across all regions. The East Midlands was the region with the highest rate of confidence, as had also been the case on the previous round of the survey.

• Most industries expect improved performance in Q3. With the exception of wholesale and retail, all of the industries with sufficiently large sample size exhibited positive readings on the SBI looking ahead to Q3. The figures for wholesale and retail was neutral, at 0.0, suggesting that such businesses expect performance to continue at its current level.

• More small businesses saw profitability decline than improve in Q2. Nevertheless, businesses are much more optimistic surrounding profitability, with a net balance of 8.6% of respondents expecting an improvement in Q3. This represents the highest reading on this metric since Q4 2015.

• Exporters fared worse than they had expected in Q2. When questioned at the end of Q1, a net balance of -9.8% of exporters had anticipated export growth in Q2, indicating a difficult outlook for trade. Q2’s actual data yields an even more negative net balance figure of -19.8%.

• The net balance of small businesses reporting an increase in operating costs increased starkly in Q2, reaching 53.2%. This marks a record quarterly uptick of 29.9 percentage points on this metric. The reopening of the economy has been a clear driver of year-on-year increases in costs, with the renewed activity stoking inflationary pressure in a number of categories. Variable costs, such as inputs and labour, were the main drivers of this increase.

• The number of businesses reporting an increase to the size of their workforce in Q2 outweighed the number reporting a decrease. A net balance of 2.2% reported workforce growth. Looking ahead, small businesses are even more optimistic about the size of their workforce, with 14.0% anticipating further growth in Q3.

• The share of businesses aspiring to grow increased by 1.7 percentage points in Q2, reaching 54.4%. The domestic economy remains the most common concern for businesses when considering barriers to growth, though the extent to which this is the case is subsiding. Appropriately skilled staff is also a commonly cited barrier, aligning with recent reports of labour shortages.

• The credit availability and affordability indices fell in Q2, reaching their lowest values since Q1 2020. Meanwhile, the proportion of small businesses seeking credit subsided further in Q2, reaching pre-pandemic levels.

UK MACROECONOMIC OVERVIEW

Economic activity surges in Q2 amidst removal of restriction measures

While Q1 was characterised by the reimplementation of lockdown measures and enforced closure for many businesses, Q2 saw the gradual lifting of these measures and a subsequent return to economic activity. Considering the Government’s roadmap for England, April brought the return of non-essential retail businesses and outdoor hospitality venues, being able to serve customers on their physical premises for the first time this year. In May the next step was taken, allowing hospitality businesses to operate indoors, while also allowing for the reopening of entertainment venues, albeit with capacity restrictions. Though the final easing of restrictions was delayed from June to July, it is clear that there has been a considerable uplift in activity across Q2.

This has been illustrated across a variety of economic indicators. Monthly GDP growth of 2.0% and 0.8% was recorded in April and May, respectively, while retail sales levels surged once more, peaking in April. Sales volumes in April were 10.5% above those witnessed in February 2020, the last pre-pandemic month. Meanwhile, the removal of some restrictions on social contact and travel has seen consumer footfall levels increase significantly. All of these findings corroborate with the sentiment expressed by small businesses on the previous round of the SBI, which reached a near-six year high of 27.3, suggesting businesses were confident of a wave of activity over the coming three-month period.

The latest round of the SBI shows that business confidence remains elevated when looking ahead to Q3, albeit slightly lower than in the previous quarter, with an SBI value of 18.6. The number of small businesses expecting their performance to improve over the coming quarter exceeds the number of small business expecting their situation to worsen. Given that the recovery is set to extend into 2022 and beyond, a continuation of this trend should be anticipated.

Nevertheless, the economy does face some headwinds, which could serve to slow growth. In the Government policy space, we are awaiting the termination of the furlough scheme, which has now entered its tapering phase before its final withdrawal at the end of September. 16 months after the onset of the pandemic, many businesses are still struggling, despite the recent uptick in activity. As such, many will find themselves unable to cover their labour costs once government support is withdrawn. This could trigger a higher rate of insolvencies as businesses exhaust their cash reserves. It is also set to lead to a wave of redundancies, forcing the unemployment rate upwards, with the latest Cebr forecasts pointing to a peak rate of 5.8% in Q4. This will likely dampen the recovery by reducing consumption levels amongst those unfortunate enough to lose their jobs, whilst also encouraging greater cautiousness amongst those who remain in work, through increasing their risk of future joblessness.

Moreover, despite a successful vaccination campaign thus far, the past weeks have shown that the pandemic is far from over. The Government has maintained its pledge to ease restrictions from 19th July, despite rising case numbers across the country. If cases accelerate further, consumers may become wearier regarding the risks of the virus, and subsequently rein in their activity.

Ultimately, the outlook for the wider economy remains positive despite these risks. Their impact is more likely to slow growth than reverse it, unless further restriction measures are required in the event of overwhelming spread of the pandemic. As such, Cebr continues to forecast 8.0% annual growth for the economy as a whole in 2021, followed by a further uptick of 5.9% in 2022.

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

Small Business confidence dips slightly amidst slowing economic recovery

The Small Business Index (SBI) slipped by 8.7 points between Q1 2021 and Q2 2021. Despite this fall, the Index remains comfortably in positive territory at a reading of 18.6. This suggests that that number of small businesses expecting an improvement in performance over the coming quarter exceeds the number expecting performance to worsen. This is the first time the Index has exhibited positive values in consecutive quarters since Q2 2018.

Q2 has brought a surge in economic activity at the aggregate level. Via the different stages of the Government’s roadmap, and equivalent measures in the devolved nations, businesses have benefitted from the easing of Covid-19-related measures. This improvement in overall economic performance in recent months aligns well with the previous reading on the SBI, when small businesses exhibited a high level of confidence looking ahead to Q2.

Looking forward, the economic recovery is set to continue, particularly given the further easing of restrictions from mid-July. There are some emerging signs that the recovery may be starting to slow, however. These findings corroborate well with the latest reading on the SBI, with fewer businesses expecting their performance to improve over the coming quarter than was the case when looking ahead to Q2. Examples of indicators exhibiting relatively lower values recently include the latest Purchasing Managers’ Indices (PMI). The

manufacturing and services PMIs stood at 60.4 and 57.8, respectively in July. These figures were down from near-term highs of 65.6 and 62.9, respectively, both witnessed in May.

Other faster indicators are also showing signs of slowdown, particularly from the consumer perspective. Data from the Office for National Statistics (ONS) show that credit card spending was 3.6% lower in June than in May, though it is important to note that this was a fall from a very high level. Meanwhile the YouGov/Cebr Consumer Confidence Index also dipped in June. These findings further line up with the recent dip in the SBI, with weaker consumer activity often translating into more subdued business prospects.

Despite these weaker data points, it should still be emphasised that the economy is currently in its strongest position since the pandemic began. GDP is expected to surpass pre-pandemic levels in Q3, with further growth anticipated in Q4 and into 2022. Insofar as this translates to heightened activity amongst small businesses, further positive values on the SBI should be expected. Nevertheless, the comparative nature of the survey question for the headline index and the slower pace of recovery from here on means that any positive values are likely to be smaller in magnitude than the near-term peak of 27.3, witnessed at the end of Q1 2021

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

Source: 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

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

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

REGIONAL SMALL BUSINESS INDICES

SMALL BUSINESS INDEX POSITIVE IN ALL REGIONS EXCEPT LONDON

The vast majority of regions exhibited a positive score on the latest round of the Small Business Index, suggesting that a greater proportion of businesses expect a performance improvement in the coming quarter than not.

The East Midlands represents the area with the highest rate of business confidence looking ahead to Q3. This was also the most confident region when looking ahead to Q2. Indeed, the region’s SBI reading has remained constant across both of these periods, at 50.0. The region is characterised by a large manufacturing base, which is set to benefit from the combination of renewed demand conditions and policy interventions, such as the capital allowance super-deduction.

London was the only region to exhibit a negative value, though the reading in the capital was only slightly below zero, at -0.9. London was also the least optimistic region on the previous round of the SBI. The termination of the UK-EU withdrawal agreement represents one likely factor behind this continued pessimism. The new EU-UK trade agreement has adversely impacted the capital, given London’s reliance on such sectors as finance and insurance and the fact that the agreement did not guarantee free trade in services. This has been further dashed

by the delay in negotiations regarding potential special access to EU markets for London-based financial services. Continued lack of commuters also represents a potential problem for London’s SMEs, particularly those reliant on consumer footfall and passing trade.

Though most regions saw their SBI scores remain in positive territory when looking ahead to Q3, there were some sharp falls in readings. This was starkest amongst businesses in the East of England, witnessing a quarterly fall of 20.3 points compared to the score when looking ahead to Q2. The North West also exhibited a large-scale quarterly fall, amounting to 18.2 points. These regions were amongst those to witness localised restriction measures in 2020, and have since seen cases rise significantly in recent weeks, amidst the spread of the Delta variant. New guidance surrounding the spread of Covid-19 has been issued in Bedford in the East of England and Blackburn, Bolton and Burnley in the North West. Businesses in these areas may well be preparing for further bouts of restrictions in the future, especially given the recent announcement by the Health Secretary, Sajid Javid, that localised measures would still be considered even after the removal of national restrictions from 19th July.

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

MOST INDUSTRIES EXPECT IMPROVED PERFORMANCE IN Q3

All major industries exhibited optimism on the latest round of the SBI, with the exception of wholesale & retail, for which sentiment amongst businesses was neutral.

The highest SBI reading looking ahead to Q3 was seen amongst businesses in accommodation & food services, with a value of 61.4. This marks an uptick of 46.4 points on the previous reading. The optimism amongst such businesses can be largely explained by the removal of restriction measures. The consumer-facing nature of such businesses means they have been amongst the hardest hit by limits on social contact and gathering. This will be their first full quarter of operation without restrictions since Q3 2020 and many businesses can expect higher activity levels as a result.

A similar story applies to businesses in arts, entertainment and recreation. This was the second most positive sector on the latest round of the SBI, exhibiting a reading of 28.9. The lifting of restrictions from 19th July in England will see the return of nightclubs, live music venues, and other entertainment spaces without capacity constraints for the first time since the pandemic began.

At the other end of the scale, businesses in wholesale and retail exhibited the lowest score of the major industries, with a neutral reading of 0.0. This suggests that businesses expect activity to continue at its current level in Q3. This lack of expectation of further improvement can be partly explained by the strong performance of much of the sector throughout the crisis so far. For instance, retail sales activity surpassed pre-crisis levels even before the removal of restrictions on the ‘non-essential’ retail category in mid-April. March 2021’s sales volumes were 1.3% higher than those seen in February 2020, with a further improvement witnessed in April, taking volumes 10.5% above those witnessed in the final prepandemic month. Sales volumes then dipped slightly in May but remain considerably elevated compared to pre-crisis levels, being 9.1% higher than in February 2020. Meanwhile, the sector has also been hit harder by disruptions to global supply chains and domestic labour shortages. Ultimately, these figures suggest there is lower scope for further improvement in performance compared to sectors that have seen much more subdued output.

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

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

and retail

FINANCIAL PERFORMANCE

BUSINESS EXPECT PROFITABILITY TO BOUNCE BACK IN Q3

The net balance of small businesses reporting gross profit growth over the previous three months stood at -1.4% in Q2. As such, the number of small businesses reporting an increase in gross profit levels was outweighed by the number reporting a decrease. Nevertheless, the reading is considerably less negative than those witnessed throughout the crisis and indeed in the years before the pandemic. This quarter, the indicator reached its highest level since Q2 2017, when the net balance of firms reporting gross profit growth stood at -0.2%. A positive reading has not been since Q4 2015, when the metric stood at 15.4%.

Looking ahead to Q3, businesses are much more optimistic surrounding profitability. A net balance of 8.6% of firms expects gross profit levels to increase between July and September. This is also the highest reading on this metric since Q4 2015, when businesses were looking ahead to Q1 2016.

Most of the main industries expect profit growth over the next quarter. Wholesale and retail businesses provide the only exception to this, with a net balance of -7.8% expecting gross profit growth. This aligns with the broader picture outlined in Section VII, with retail businesses expecting to struggle with supply chain disruptions and labour shortages in Q3. Businesses in information and communication are the most optimistic looking ahead to Q3, with 20.6% of such businesses anticipating an improvement in gross profits. Businesses in arts, entertainment and recreation also exhibit a high net balance of 17.3%. This can be explained by the fact that Q3 will mark the first mostly uninterrupted quarter of trading for many such businesses, given the removal of restrictions in England from 19th July.

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

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

EXPORTS

EXPORTERS FARED WORSE THAN EXPECTED IN Q2

The net balance of exporters reporting growth in the value of their exports improved slightly in Q2, reaching -19.8%, having stood at -28.4% in Q1. Despite this slight improvement, the export landscape remains one of negativity. This is further confounded when comparing the recent experience with prior expectations. For instance, when questioned at the end of Q1, a net balance of -9.8% of exporters had anticipated export growth in Q2. Comparing this to the -19.8% figure shows that the actual performance of exporting businesses in Q2 was even weaker than had been expected.

Looking ahead, exporting firms anticipate a challenging period, albeit less negative than that experienced in Q2. A net balance of -11.2% of exporters anticipate growth in export value in Q3. Notably, exporters’ expectations for Q3 are more

muted compared to their prior expectations for Q2, suggesting that optimism amongst exporting businesses towards the future is fading.

Data from the ONS show that aggregate exports are up year-on-year. The volume of exports in May was 10.6% above that witnessed in May 2020, for instance. However, given the impacts of the initial wave of coronavirus on dampening international trade, a more useful comparison involves consideration of prepandemic values. Export volumes in April and May were down by 8.7% and 7.6%, respectively, compared to the same months in 2019. In addition to the effects of the pandemic, UK exporters also have to deal with the Brexit fallout. This impact of this on trade is supported by the fact that non-EU trade in May 2021 was up compared to May 2019 values, while EU trade was down.

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

INPUTS AND LABOUR DROVE OVERALL COST INCREASES IN Q2

The net balance of small businesses reporting an increase in operating costs surged in Q2, reaching 53.2%. This marks a quarterly uptick of 29.9 percentage points, the largest increase on record.

The reopening of the economy throughout Q2, in line with the Government’s roadmap, has been a clear driver of increased costs amongst businesses. During the same period a year ago, businesses were facing the initial effects of the pandemic, with many forced to close completely, put staff on furlough, or otherwise alter their operations to cope with new remote working requirements and subdued demand. These factors culminated in reduced activity amongst businesses. As such, any year-on-year increases in costs likely reflect much higher output levels and the associated uptick in variable costs. Moreover, not only are businesses nearing output levels last seen prior to the pandemic, but producer prices have also risen significantly across several categories as global economies have started to emerge from the crisis. Supply chain bottle necks, an increase in the cost of international freight traffic and higher raw material prices have all worked together to push up business costs over the past months.

This is clear when considering the categories driving the cost changes amongst small businesses. Inputs were the most commonly cited category, being selected by 42.5% of respondents. Labour costs were also commonly cited by small businesses, being selected by 35.6%. This time a year ago, many businesses saw their labour costs fall as a result of government support from the furlough scheme, reduced working hours, and widespread pay cuts. This compares starkly to the current situation whereby furlough usage is much less prevalent and staff shortages are reported in several sectors, leading to higher labour costs.

Utilities were the next most common response category, selected by 27.6% of respondents. This again reflects the initial impact of the pandemic. Utility prices had plummeted in Q2 2020, reflecting volatility in global commodity markets and significantly lowered demand levels. This has manifested in high annual inflation rates across gas and oil, putting upward pressure on businesses’ costs.

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

EMPLOYMENT

BUSINESSES EXPECT WORKFORCES TO INCREASE IN SIZE, THOUGH LABOUR SHORTAGES COULD PROVIDE A HURDLE

The net balance of small businesses reporting growth in the size of the workforce stood at 2.2% in Q2. This marks the first time this indicator has stood in positive territory since Q3 2019. As such, the number of businesses seeing their workforce increase in size outweighed the number of businesses seeing a contraction in employee numbers. This finding aligns well with recent labour market trends, including a falling unemployment rate and significant uptick in vacancy numbers.

Looking at the data by region, increases to the size of the workforce were most prevalent in the North West, with a net balance figure of 10.5%. Meanwhile, businesses in manufacturing exhibit the highest net balance when considering industries, at 8.5%. In line with a return to pre-pandemic output levels, SMEs are

looking to bolster headcount numbers in order to be able to make the most of the opportunities provided by the current economic recovery.

This also explains why the outlook for workforce size is positive when considering expectations for Q3. A net balance of 14.0% of small businesses expect their workforce to increase in size over the coming quarter. The extent to which businesses are able to realise this expectation remains to be seen, however. There have been reports of labour shortages in recent months, particularly in sectors such as construction and hospitality, meaning firms may be unable to fill all of their positions. If such shortages are to continue, this would likely put further upward pressure on wage rates and could subsequently manifest in future rounds of the SBI in the Costs and Inflation section.

Figure 11: Net percentage balance change in number of people employed – proportion reporting increase, less proportion reporting decrease

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

GROWTH ASPIRATIONS AND CHALLENGES

MORE THAN HALF OF SMALL BUSINESSES EXPECT TO GROW OVER THE COMING YEAR

The share of businesses saying that they are aspiring to grow over the next twelve months increased slightly in Q2, reaching 54.4%. This marks a 1.7 percentage point increase on the value witnessed in Q1. 13.0% of businesses expect to contract over the coming year, a slight uptick on the 12.8% reporting this in the previous quarter.

Growth aspirations were most common amongst businesses in the information and communication sector, with a combined 64.7% of such businesses expecting to grow either rapidly or moderately in the coming year. This high rate of growth aspiration likely

reflects the stronger performance of such businesses amidst the pandemic. Businesses in information and communication have adapted to remote working practices significantly more smoothly than other businesses and thus faced less disruption. This has likely allowed more resources to be devoted to forward planning, rather than managing difficulties at present.

At the other end of the scale, just 41.1% of businesses in accommodation and food services expect to grow in the coming year.

Figure 12: Growth aspirations for next twelve months

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

CONCERNS OVER DOMESTIC ECONOMY REACH TWO-YEAR LOW

The domestic economy was once again the most common response when businesses were asked about the potential barriers to their growth aspirations. Nevertheless, the proportion of businesses citing this option fell considerably, reaching 57.8%, down from 68.5% in Q1 and values in excess of 75.0% in each of 2020’s quarters. Indeed, the proportion of businesses citing the domestic economy as a potential barrier to growth was at its lowest since Q2 2018.

Appropriately skilled staff overtook consumer demand to become the second most commonly cited response in Q2. This was selected by 36.9%

of respondents, up from 27.3% in Q1, with this likely reflecting the reports of labour shortages, with some firms having already struggled to fill vacancies in Q2.

The proportion of businesses citing rent/premises as a potential growth barrier declined in Q2, reaching just 9.6%. This is down from 14.2% in Q1. A potential explanation for this is the recent extension to the ban on corporate evictions. The ban on landlords evicting will firms for unpaid commercial rents will now remain in place until 25th March 2022 taking the immediate pressure off firms struggling to pay.

Figure 13: Potential barriers to achieving growth aspirations – multiple answers possible Source: FSB - Verve ‘Voice of Small Business’ Panel Survey

CREDIT

CREDIT REQUESTS FALL FURTHER TO REACH PRE-PANDEMIC LEVELS

Figure 14: 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?

No – 86.6%

No – 32.1%

Yes –13.4%

Were you successful?

Yes – 54.8%

What rate were you offered?

Decision pending – 13.1%

There was a further drop in the proportion of businesses applying for credit in Q1, with only 13.4% of surveyed businesses doing so in Q2 2021. This is the fourth consecutive quarterly fall on this measure, down from the peak of 33.9% in Q2 2020. Indeed, the 13.4% figure is the lowest on this metric since Q4 2019, suggesting that borrowing rates amongst small businesses have now returned to pre-pandemic levels.

The average interest rates offered to businesses taking out loans has increased between Q1 2021 and Q2 2021. While the vast majority of successful credit applicants were offered an interest rate below 4.0% in Q1, amounting to 76.1% of respondents, this proportion slipped to just 47.9% in Q2. Meanwhile, the proportion of credit applications being successful reached just 54.8% in Q2. This marks the lowest figure since Q2 2015.

Figure 15: 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 AND AFFORDABILITY INDICES DIP TO LOWEST LEVELS SINCE Q1 2020

30.0% of small business described the availability of credit as good or very good in Q2. This is down from 35.2% in Q1. As a result, the credit availability index fell, reaching -10.2. This marks the lowest reading since Q1 2020, with the intermittent quarter being characterised by strong credit availability. This availability had stemmed from government policies to support businesses throughout the Covid-19 crisis, such as the Coronavirus Business Interruption Loan Scheme (CBILS).

The share of businesses rating the affordability of credit as either affordable or very affordable also fell in Q2. This proportion reached 31.4%, having stood at 38.3% in Q1. As such, the credit affordability index also fell, reaching -6.5, its lowest value since Q1 2020. This drop in the credit affordability index reflects the shift away from low interest loans being offered to small businesses, as outlined in the above subsection.

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

Figure 16: Indices of credit affordability / availability perceptions over time, a weighted net balance of those with negative responses subtracted from those with positive responses

INVESTMENT

INVESTMENT OUTLOOK SUBSIDES

SLIGHTLY AHEAD OF Q3

27.9% of small businesses anticipate increased investment levels over the coming quarter. This marks a downtick from the previous value, when 32.8% of respondents expected increased investment over Q2.

Over the course of Q2, many businesses had to invest in order to Covid-proof operations if they were reopening for the first time this year. This was particularly the case amongst consumer-facing businesses, such as those in accommodation and food services. Indeed, businesses in this sector are more likely to expect to cut back investment over the coming quarter, rather than increase investment. This

highlights the extent to which they invested in the prior quarter.

Businesses in manufacturing are the most likely to expect investment to increase over Q3. This is the case for 40.9% of such businesses. This heightened expectation for investment is partly driven by the new tax super-deduction, announced in this year’s Budget by Chancellor Rishi Sunak. This allows businesses to reduce their tax bill by 130% of their investment costs. Since this policy only applies to plant and machinery capital, this is most likely to apply to manufacturing businesses.

quarter, compared with previous quarter

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

Figure 17: % of small businesses expecting to increase and decrease capital investment over next

METHODOLOGY

This report is based on the June and July research survey of FSB members carried out by Verve. 5,687 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. 541 responses were received, a response rate of 9.5% for the panel. The survey was then shared with wider FSB members and received a total of 1,561 responses. The data are weighted by regional gross value added to match the profile of small businesses across the UK. The survey was undertaken between 24 June and 9 July May 2021.

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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