Small Business Index, Quarter 4, 2020

Small Business Index hits second-lowest point in ten-year history

250,000 small business owners fear they’ll have to shut for good CLOSED

23%

have been forced to let staff go

Small business confidence by sector Job losses mount

Expect international sales to fall next quarter Exporter confidence tumbles

49%

FSB FOREWORD

In normal times, the New Year is a moment for small business owners to take stock. A chance to revisit strategies with a fresh pair of eyes, assessing opportunities and risks for the 12 months ahead. Sadly, 2020 has been anything but normal.

When we spoke to members for the Q4 Small Business Index at the end of December, they told us that such positive forward planning has been stifled by Covid-linked restrictions, dire festive trading and incoming paperwork borne of a fresh EU-UK trade deal. Surviving the next three months is all the vast majority can think about.

The Q4 small business story is a story of dashed hopes. It stands in stark contrast to Q3 when optimism was in ready supply: the Eat Out to Help Out scheme was a roaring success and there were still, whispered perhaps, hopes that the misery wrought by Covid could be brought to bear by the end of the year. Christmas, we were told as we headed into autumn, was on.

Then, in the three months to December, it all came crashing down. News of tighter lockdowns across the UK came through in November, followed by the announcement that Christmas was off, days after we were told that festivities would proceed.

The headline UK SBI confidence measure has sunk to the second-lowest point in its 10-year history – only in March of last year, when this all began, has it been lower. Given the SBI was launched in the immediate aftermath of the financial crash, these figures should serve as a loud a wake-up call for policymakers. The turmoil faced within small firms shows no signs of abating. Lives, and livelihoods, are under immense strain in local communities right across the country.

That said, with the vaccine programme picking-up pace and promises of significant improvements to our test-and-trace infrastructure, there are reasons to be hopeful. Many small firms have adapted, especially on the digital side, to keep themselves viable in a rapidlychanging environment.

What they need to keep afloat at this juncture is three things.

First, the business support required to get them through to the Spring when, according to the Government’s timetable, they should be able to trade more freely again. Extending the furlough scheme is fine, but there’s no use doing so if there are no jobs to furlough. We urgently need to see a significant uprating of cash grants, extension to business rate holidays and VAT deferral windows and an ambitious rescue package for forgotten groups – directors, the newly self-employed, those further down retail, leisure and hospitality supply chains, and those without commercial premises, to name just a few. Transition vouchers – funding for cash-strapped exporters and importers to make necessary adjustments to their operations in light of new EU-UK trading rules – are also a must.

Second, responsible treatment of emergency debt facilities. Hundreds of thousands of small firms have taken on sizeable bounce back loans to see them through these hard times. Many have borrowed in order to adapt and innovate – it would be a tragedy to lose the great businesses of tomorrow because of a failure to extend grace periods today.

And third, a clear roadmap for getting us back to something more like normality. The vaccine programme has come out of the blocks strong, but we still need to see much more from test-and-trace – we were promised world class infrastructure, there is still time to deliver it. Equally, The Treasury should be conscious of everything that small firms have been through of late – confidence has been in negative territory for two years now – tax rises must be eschewed for the rest of 2021 if we want businesses firing on all cylinders again, driving our economy forward.

Where all of the above is concerned, we need to see action now. The Government is talking about a March Budget, but support at that point will prove too little too late for many of the 250,000 small businesses planning to close over the next 12 months.

We’ve had the nightmare before Christmas. As we greet the New Year, we call on policymakers to give small firms a chance to pursue their dreams in 2021.

Mike Cherry, National Chairman

Martin McTague, National Vice Chair, Policy and Advocacy

ECONOMIST’S VIEW

Small business confidence took another significant hit in the fourth quarter of 2020 as the FSB Small Business Index (SBI) fell to -49.3. A worse score on the index has only ever been recorded in Q1 2020 when the first wave of coronavirus cases prompted the nationwide shutdown of the economy. The latest fall in the SBI comes on the back of a significant deterioration in the pandemic situation across the country. Following the end of a second national lockdown in the first week of December, businesses and governments alike had hoped that a tiered system of restrictions would be sufficient to keep the virus in check until a large-scale roll-out of vaccines would provide a broad level of safety for the population. However, the discovery of a new, more virulent strain of the disease and the associated explosive rise in new infections has meant that national governments had no choice but to place most of the UK under stricter social distancing rules in December. This latest round of tighter restrictions culminated in the third national lockdown which came into effect in England on 5th January, with similar restrictions applying in the devolved nations.

As restrictions were tightened over the past weeks and months, the government also moved to increase its financial support for the economy. In December, Chancellor Rishi Sunak announced that the popular furlough scheme would be extended until at least April 2021, giving businesses some sort of planning security with respect to the wage bill for their employees. A further £4.6 billion was made available in new lockdown grants in January 2021. Despite the government’s efforts, it is expected that swathes of businesses that fall through the cracks of the system, and whose cash reserves have been depleted over the course of the past year, are in danger of entering bankruptcy over the coming weeks and months.

The businesses most affected by the latest developments are once again those in the services sector relying heavily on face-to-face interaction, such as the accommodation and food services sector and the arts, entertainment and recreation sector. With SBI scores of -108.1 and -98.7, respectively, these are also the industries at the bottom of the SBI table. Wholesale and retail trade businesses saw a marked deterioration in confidence, ranking third-last in the Q4 2020 SBI table with a score of -79.4 as Brexit negotiations were still on a knife edge by the time the survey closed.

We observe that considerably more businesses are unconfident than confident across all regions and nations. Scotland and London can be found at the bottom of the regional SBI ranking with scores of -69.0 and -60.9, respectively. London in particular has suffered from a dramatic explosion in infections and was put under Tier 4 restrictions just before Christmas. Meanwhile, the East Midlands and the West Midlands are the regions where businesses are the least unconfident with scores of -22.8 and -35.9.

With a new national lockdown in place until at least mid-February, the UK’s small businesses are looking anxiously towards the New Year with many struggling to make ends meet. A further contraction in GDP in Q1 2021 is almost certain, pushing out the timeframe for the economic recovery further into the second half of the year. At some point in the summer, however, the vaccine roll-out should provide a substantial amount of protection for the population and we expect the recovery to then take hold firmly, in part driven by households’ lockdown savings. For businesses which have struggled throughout the past year, the key priority for 2021 will be to stay afloat until then.

Kay Daniel Neufeld, Head of Macroeconomics, Cebr

Key findings this quarter:

FSB VOICE OF SMALL BUSINESS INDEX FSB EXECUTIVE SUMMARY

• The FSB Small Business Index slipped further in Q4, reaching -49.3. This outweighs the score witnessed in Q3 to become the second-lowest reading on record.

• Unanimous negativity was witnessed when considering business sentiment on a regional basis. Scotland was the least confident region of the UK, with an index score of -69 0 The East Midlands was the highest scorer with a reading of -22 8 Alongside Wales and the West Midlands, the East Midlands was one of only three regions to experience an improvement in business sentiment between Q3 and Q4

• All major sectors exhibited negative index scores in Q4. There was some significant variation in scores, however, reflecting differing levels of business disruption caused by lockdown measures Accommodation & food services remains the least confident industry, reporting a score of -108 1 At the other end of the scale, businesses in professional, scientific & technical activities were the most resilient, scoring -19 9

• Businesses’ downbeat forecast of profits in Q1 2021 largely matches their experience in Q4 2020. A net balance of -39 4% of small businesses anticipate gross profit growth in the first quarter of 2021, almost mirroring the -38 8% figure exhibited when reporting Q4’s gross profit growth

• Exporting businesses anticipate a further decline in the value of such exports in Q1. The net balance of firms expecting export growth in Q1 stands at -29 0% This marks a considerable slip from the net balance of -16 0% reporting export growth in Q4 Brexit uncertainty and potentially declining global demand amidst the latest wave of coronavirus infections are likely key factors behind this sentiment

• Nearly half (46.5%) of all businesses experienced cost increases in Q4. Labour and inputs remain the two most common sources of cost changes amongst firms, being selected by 29 8% and 29 4% of firms, respectively The proportion of firms citing the exchange rate as a main source of cost increases saw an uptick of 4 4 percentage points between Q3 and Q4, the largest of any category

• The rate at which small businesses cut employment levels remained considerably above historic averages during the last three months of 2020. 22 3% of small businesses reported cuts to their workforce in Q4 Cuts were most prevalent in London and Scotland, aligning with these regions being the two weakest scorers on the headline index

• Growth aspirations fell back in Q4. The net balance of small businesses expecting to expand slipped by 7 0 percentage points compared to Q3, reaching 18 2% Business pessimism is further illustrated by the growing rate of businesses expecting to cease operations in the coming year, which reached 4 3% in Q4 This was particularly prevalent in the accommodation & food services sector, with closure being considered by 10 7% of such businesses

• Firms perceive the wider economy to be the key barrier to their growth over the next year, with this being cited by 76.7% of survey respondents. This is of little surprise given the weakness of demand conditions amid continued restriction measures and the prospect of a double dip recession for the UK economy

• The credit availability and affordability indices slipped back from their respective highs. Nevertheless, at -5 2 and -0 1, respectively, both measures remain above historic averages

This reflects the importance placed on credit by government policymakers, with this being pivotal to short-term business liquidity and overall survival

UK MACROECONOMIC OVERVIEW

New restriction measures invoke double dip recession

While the third quarter of 2020 was characterised by a reopening of the economy and a return to activity, Q4 stood in stark contrast as restriction measures were once again progressively tightened across the country. Though much of the economy entered the quarter without being subject to targeted measures against coronavirus, urban centres across the North of England entered localised restriction in October, resulting in clear regional discrepancies in economic performance. Being insufficient to contain the virus’s spread, these regional measures were followed by a second national lockdown across England in November and similarly strict restrictions in devolved nations. For instance, Wales entered a 17-day ‘firebreak’ lockdown earlier on 23rd October, moving down to a tiered system of restrictions from 9th November. This lockdown imposition has brought about a further period of dwindling economic activity, caused by enforced closures of businesses across such sectors as retail and hospitality, as well as lessening consumer activity in light of stay-athome messaging and travel restrictions. Though the economy was able to reopen temporarily in December, the reimplementation of the tier system and, indeed, the further tightening of restrictions across London and the South East in the middle of the month will have contributed to even more downward pressure on economic output.

Looking ahead, the near-term outlook remains equally bleak. With a new lockdown coming into force across all regions and devolved nations in the UK in early January, the New Year looks set to begin with another quarter of output contraction while the country is fighting to get on top of the new strain of coronavirus and the accompanying rapid rise in cases. While the current January lockdown is stricter than the restrictions seen in November, it is not quite as severe as the first lockdown in the spring of 2020. With enforced closure of business premises and limits on household interaction, we will undoubtedly see a fall in economic output on a national scale. There are some differences to the first lockdown, however. Key industries such as construction and manufacturing have been given the green light to remain open, having adapted their operations to meet the need for social distancing and new safety measures. Meanwhile, many white-collar jobs have become accustomed to remote working practices in the past year, meaning the onset of a new lockdown poses much less of a disruption compared to that witnessed just less than a year ago. Together, these factors suggest that any GDP falls will be proportionally smaller in magnitude, with this being further confounded by the fact that the economy is starting from a lower base level of output. Nevertheless, the UK is set for a double dip recession.

Vitally to the economy’s health, the extension of restriction measures had been preceded by an extension of government support packages, notably that of the Coronavirus Job Retention Scheme. In the case of jobs reliant on face-to-face contact and social interaction, such as those in hospitality and the arts, workers face another period of enforced time away from the workplace. Meanwhile, heightened economic uncertainty poses a near-term threat to activity across many other sectors, meaning firms may find themselves overstaffed, requiring support to cover the costs of excess labour. As such, this extension of support will be vital to the continued protection of both individual and business livelihoods.

Progress on coronavirus vaccines does provide some light at the end of the tunnel, however. By current projections, the vaccine roll-out will enable a safe return to activity amongst individuals at some point in the summer, bringing scope for a significant improvement in demand conditions. Though 2021 begins with a significant near-term hurdle in the form of the ongoing lockdown, there is cause for considerable positivity once this has been surmounted. A pivotal question is thus the extent to which small businesses are able to weather the storm of the tough few months ahead, with those who survive likely to benefit from the wider uptick in economic fortunes later in the year.

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 plummets amidst November lockdown

The Small Business Index (SBI) slipped by 16.7 points between Q3 and Q4 in a second consecutive quarterly fall. The index now stands at -49.3, the second-lowest level in its history, with business confidence being damaged by the November lockdown and further restrictions during the quarter. The index has now stood in negative territory for 10 consecutive quarters, with little hope for an improvement in the near-term given the new lockdown measures implemented in early 2021. Nevertheless, the mid-term outlook for 2021 is one of renewed economic activity, fuelled by the rollout of coronavirus vaccines, bringing the potential for a return to positivity for the index later in the year.

Although official data did show an increasing level of economic activity in early Q4, the rate of increase had markedly slowed in comparison to that witnessed in the immediate aftermath of the spring lockdown and throughout the summer months. UK GDP in October picked up by just 0.4% compared to September, for instance, marking a slowdown compared to the growth rates of 6.3%, 2.2% and 1.0% seen in July,

August, and September, respectively. GDP growth will have been drawn to an abrupt halt in November, however, as a result of the reimplementation of restriction measures across much of the UK to combat the acceleration in new infection numbers. This brought another period of curtailed economic activity, enforced business closures and weak consumer footfall. Early indicators of the lockdown’s impact can be inferred from the UK Purchasing Managers’ Index, with both the services and composite PMIs slipping into contractionary territory during November, reaching 47.6 and 49.0, respectively. The corresponding measures for construction and manufacturing saw an uptick, however, reaching 55.6 and 54.7, respectively, in a reflection of their ability to continue operating despite wider restrictions. Meanwhile, from the perspective of consumers, Google mobility data suggested that seven-day rolling average footfall in retail and recreation spaces was 60.7% lower in November than in October, with the corresponding figures for workplaces and transit stations pointing falls of 22.4% and 25.2%,

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

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

REGIONAL SMALL BUSINESS INDICES

SMALL BUSINESS SECTOR INDICES

NOVEMBER LOCKDOWN HITS RETAIL, ARTS, AND HOSPITALITY HARDEST

All major industries exhibited pessimism on the latest round of the SBI, as had also been the case in Q3. The range of index scores was slightly narrower than that witnessed in Q3, reflecting improvements in attitudes amongst the most pessimistic industries, as well as a greater degree of pessimism from those industries with the highest readings.

Once again, professional, scientific & technical activities yielded the least negative score in Q4, with a reading of -19.9. This does reflect a significant quarterly decline of 18.4 index points, however. The relative fortunes of professional, scientific & technical activities can be once more attributed to lower levels of business disruption amidst restriction measures compared to other industries, particularly those less adept at remote working. Businesses in construction ranked second in terms of the SBI reading, with a score of -20.8. This marks a slight improvement of 2.2 index points on the Q3 score of -23.0 and reflects the ability of businesses in the sector to continue working in spite of wider restriction measures. This is largely due to the outdoor nature of operations in the sector and a subsequently less burdensome impact from social distancing.

One industry that has faced a noticeable barrier to activity through restriction measures is that of arts, entertainment, & recreation. The sector’s index score remains firmly in negative territory and, indeed, saw a further slip in Q4, reaching -98.7 having stood at -58.0 in Q3. Even without the formal restrictions imposed through the November lockdown, the sector continues to suffer from weak consumer footfall amid fears over the virus’s spread and a cutdown in discretionary spending. Despite the steep fall between Q3 and Q4, the arts sector is not the most pessimistic industry, with this position still being held by accommodation & food services. As one of the sectors most severely impacted by coronavirus restriction measures, it comes as little surprise to see an overwhelmingly negative index score of -108.1. The November lockdown brought the sector to a near complete standstill, with the exception of takeaway food and beverage services, while restrictions prior to this, such as curfews on opening times, had already put the sector in a position of weakness. Triggered by the enforced closure of non-essential retail stores in November, the wholesale and retail sector also saw a considerable downturn in fortunes during Q3, with the index reading falling from -42.6 to -79.4.

Figure six: FSB Small Business Index by sector – small business prospects over coming three months. Source: FSB - Verve ‘Voice of Small Business’ Panel Survey.

PROPORTION OF BUSINESSES EXPECTING DECLINING PROFITS IN Q1 MIRRORS ACTUAL EXPERIENCE OF Q4

The net balance of small businesses reporting growth in gross profits during Q4 stood at -38.8%. This consisted of more than three fifths (60.1%) of firms reporting a decrease in gross profits, with only 21.3% of firms exhibiting an increase. The net balance figure does represent a marked improvement on that witnessed in Q2, when this question was last asked, during which a net balance of -58.7% reported gross profit growth. This included falling profits amongst 74.9% of small businesses nationwide.

On a regional basis, there were considerable parallels between assessments of financial performance and overall business confidence. For instance, Scotland was both the weakest scoring region on the overall SBI measure and in terms of gross profit growth, with a net balance figure of -51.1%. Breaking this figure down shows that Scotland also had the highest proportion of small businesses reporting a decline in gross profits (67.0%) and the lowest proportion reporting an increase (15.9%). At the other end of the scale, the East Midlands saw the second-highest net balance figure on the gross profit measure, with a score of -27.9%, topped only by Yorkshire and the Humber’s -22.5%. This partially aligns with the East Midlands’ position as the most resilient region on the headline SBI measure in Q4 and is indicative of the link between business confidence and short-term financial performance.

With a net balance of -83.0% reporting gross profit growth, accommodation & food services was the worst performer on an industry-by-industry basis, reflecting the fact that businesses in the sector are amongst the first to be closed in the event of new restriction measures. Furthermore, even when these businesses were open, they have found their margins squeezed by capacity constraints and social distancing, as well as industry-specific measures such as curfew times. The most resilience was displayed by construction firms, with a net balance figure of -9.6% reporting gross profit growth. This mirrors their positive performance on PMI readings, while further reflecting their ability to remain open amidst wider economic restrictions.

Small businesses have similar levels of pessimism regarding their profit levels over the next three months as that witnessed over the last quarter. The net balance of firms expecting gross profit growth in Q1 2021 stands at -39.4%, slightly down on the -38.8% recorded in Q4. Similar patterns can once again be witnessed when looking at regions, with Scotland exhibiting the lowest net balance figure at -53.3% and the East Midlands the highest at -14.5%. This is also the case with sectors, with construction and professional, scientific & technical services recording the highest scores at -6.8% and -19.2%, respectively, and accommodation & food service and arts, entertainment, & recreation receiving the lowest scores at -65.8% and -61.0%, respectively.

In relative terms, businesses in wholesale and retail are the most pessimistic looking ahead to Q1 compared to their experience in Q4. A net balance of -55.8% of businesses in the sector anticipate profit growth during the quarter. One explanatory factor here is that of Brexit uncertainty, with the survey data being collected prior to the conclusion of EU-UK withdrawal negotiations, when concern over a no-deal exit from the EU was rife.

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.

COSTS AND INFLATION

NEARLY HALF OF FIRMS EXPERIENCED COST INCREASES IN Q4

The net balance of small businesses reporting an increase in operating costs increased further in Q4, reaching 27.7%, having previously stood at 12.2% in Q3. This was driven by the dual effects of an increase in the proportion of firms experiencing cost increases, reaching 46.5%, and a fall in the share of firms experiencing a decrease in costs, standing at 18.8%.

As was also the case in Q3, the two most commonly cited sources of changing costs were labour and inputs, being selected by 29.8% and 29.4% of respondents, respectively. In the case of the former, the increases to costs will likely reflect the return of workers from furlough, which continued into Q4, resulting in higher wage bills. Moreover, for employees remaining on furlough, the proportion of wages subsidised by the government was cut to 60% in October, leaving firms to pick up at least 20% of the bill. This will have further increased labour costs. In the case of inputs, the temporary uptick in wider economic activity will have fostered increased output for individual firms, thus affecting their variable costs.

The proportion of firms citing the exchange rate as a main source of cost increases stood at 12.2%, representing an uptick of 4.4 percentage points between Q3 and Q4, the largest increase of any category. Sterling was noticeably weaker in Q4 2020 than in the same quarter of 2019, with GBP/EUR hitting a low of 1.09 in December amid the high-stakes Brexit negotiations. With a weaker pound entailing more expensive imports for UK firms, this has acted as a source of upward cost pressure.

Regulation also served as a considerable source of cost pressure for businesses in Q4. The category was cited as a main source of cost changes by 22.0% of businesses. This too could link back to the reimplementation of restriction measures, which created a significant barrier to business activity. For instance, businesses had to comply with new guidelines and be deemed ‘Covid-secure’, leading to changes to operations and higher costs. Particularly affected in this regard were businesses in accommodation & food services, with regulations being cited as a source of cost increase by 29.9% of such businesses.

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.

CAPACITY

BUSINESSES’ ASSESSMENTS OF SPARE CAPACITY REMAIN ELEVATED BETWEEN Q3 AND Q4

Businesses operating below capacity were once again prevalent in Q4. Indeed, businesses’ assessments of their own capacity were largely unchanged from Q3. In the third quarter, 71.5% of businesses had reported below capacity operations with this figure slipping by just 0.1 percentage point to 71.6% in the fourth quarter. Meanwhile, a similarly small change was seen when considering the proportion of firms operating at or above capacity, with this standing at 28.4% in Q4, down by 0.1 percentage point from Q3.

Below capacity operations were most prevalent amongst businesses in the North West, being cited by 76.5% of SMEs in the region. Meanwhile, nearly all businesses in the arts, entertainment & recreation sector, as well as those in accommodation & food services, ran below capacity in Q4, with this being reported by 94.9% and 93.2%, respectively.

Shortfalls in activity were witnessed even for those businesses reporting the most resilience amidst wider restriction measures. 49.6% of businesses in the construction sector reported operating below capacity in Q4, for instance, while the same can be said for 56.6% of businesses in professional, scientific & technical activities.

Businesses’ expectations of spare capacity remain gloomy as we enter 2021. The proportion of firms expecting to run below capacity in the first quarter stands at 70.5%, largely unchanged from the share of businesses reporting that to be the case in Q4 and well above the historical average. Indeed, the net balance figure for Q1 expectations is completely unchanged from the figure experienced in Q4, with both standing at 63.7%. As such, it is clear that businesses remain downbeat on their near-term outlook. Following imposition of the new national lockdown in January, even this sobering assessment of expected spare capacity could prove too optimistic for Q1 2021.

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

SMALL BUSINESSES FORCED TO LAY OFF MORE EMPLOYEES IN Q3

More than one in five (22.3%) of our survey respondents reported cuts to the size of their workforce in Q4. This marks a lower prevalence of workforce cuts than that witnessed in Q2 or Q3, when 22.8% and 24.7% of firms cut their staff levels, respectively. The figure remains considerably elevated above historic averages, however. Looking at the data by region, workplace cuts were most prevalent in London and Scotland, where 29.0% and 25.3% of businesses saw decreases to the number of employees, respectively.

While Q3 was characterised by a considerable return to economic activity, the same cannot be said for much of Q4 as the country found itself firmly in the grip of the second wave of coronavirus cases. As such, while Q3 saw an uptick in the proportion of firms reporting increases to the workforce, the opposite was true in Q4. Just 6.8% of small businesses experienced growth in employee numbers in Q4, a 2.7 percentage point fall on the figure witnessed in Q3.

Returning to Q3’s survey, 17.0% of firms had anticipated making cuts to their workforce when looking ahead to Q4. Many redundancies will have been made in spite of the furlough scheme extension, with firms having made decisions over resourcing prior to the announcement of prolonged government support. Indeed, experimental statistics on the labour market pointed to 28,000 payroll losses in November, the month many firms had anticipated furlough support to be withdrawn. Looking ahead to Q1, the proportion of firms expecting cuts to their workforce has fallen once more, reaching 14.0%. This likely reflects the extension to the furlough scheme, which will now run until the end of April, meaning government support for the labour market will continue throughout the entirety of Q1. Insights from the latest survey suggest that the withdrawal of the government’s Job Retention Bonus had little effect of businesses and their decisions relating to employment structures and bringing workers back from furlough. Indeed, a majority (65.3%) said that this withdrawal had no impact on their business at all.

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.

THIRD CONSECUTIVE QUARTER OF ANNUAL SALARY CONTRACTION AMONGST SMALL BUSINESS EMPLOYEES

The average salary change awarded by small businesses exhibited a further annual fall in Q3, having also done so in Q2. The magnitude of the fall increased in Q3, however, with wages contracting at a rate of 0.4%. This follows a fall of 0.1% in Q2. The wage constraint shown by small businesses stands somewhat in contrast to the more volatile economywide wage growth figures released by the ONS. Labour market data show a much steeper annual decline of 2.4% amongst private sector employees in Q2, before slowing to a 1.1% annual decline in July, and returning to annual growth in August. By keeping wages in check, UK SMEs might try to preserve cash flow in order to prevent an even larger number of layoffs.

On a regional basis, falling wages have been most likely amongst employees in London and Wales. Here, businesses reported annual falls in the average salary awarded in 23.1% and 19.7% of cases, respectively. Wage cuts were much less prevalent in the North West and in the combined region of Yorkshire and the North East, with reductions in average salary being reported by 11.8% and 10.5% of firms.

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

MORE THAN ONE IN TEN BUSINESSES IN ACCOMMODATION AND FOOD SERVICES ANTICIPATE PERMANENT CLOSURE IN THE COMING 12 MONTHS

Growth aspirations appear to have taken a hit in Q4, with the net balance of small businesses expecting to expand falling back by 7.0 percentage points compared to Q3, reaching 18.2%. Within this figure, 39.9% are expecting to grow in the coming year, a smaller proportion than in Q3, when 44.5% of firms had earmarked future expansion. Meanwhile, 21.6% of firms are expecting to downsize over the next 12 months, a larger proportion than was the case in Q3, when the figure stood at 19.2%.

Firms’ pessimism is further underlined by the fact that 4.3% of respondents anticipated closing their business for good in the coming 12 months. This represents the highest recorded figure on this measure. Such sentiment was particularly prevalent amongst businesses in Scotland, being cited by 6.0% of respondents, and in businesses in the accommodation & food services sector, within which more than one in ten (10.7%) businesses anticipated permanent closure.

Grow rapidly/moderately (LHS)

Downsize, close or hand on business (RHS)

Remain the same size (LHS)

Figure 14: Growth aspirations for next 12 months.

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

EXPECTED DOUBLE DIP RECESSION MEANS WEAK DOMESTIC ECONOMY REMAINS FOREMOST BARRIER TO GROWTH

Given the uncertainty and prolonged periods of curtailed activity since the onset of the crisis, it is no surprise that firms cite the domestic economy as the most likely barrier to their growth over the next 12 months, with this being reported by 76.8% of small businesses.

Consumer demand remains another major barrier for small businesses, being cited by 42.3% of respondents. Though confidence did pick up over the summer months, the outlook remains fragile. Consumer demand is likely to face some further turbulence in the coming months, through weakening labour market conditions and further implementation of restriction measures.

The labour market itself also presents a concern for firms. The end of the furlough scheme is set to bring a spike in redundancies, with firms having to cut costs in light of weak demand conditions. This has left small businesses with tough decisions over keeping workers, with 28.5% anticipating redundancies in Q4. As a result, many firms have expressed concerns over having appropriately skilled staff, with just over a fifth (21.1%) expecting this to be a barrier to their growth over the coming year.

Figure 15: Potential barriers to achieving growth aspirations – multiple answers possible.

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

CREDIT

FEWER BUSINESSES MADE CREDIT REQUESTS IN Q4 THAN IN PRECEDING TWO QUARTERS

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?

No – 82 5%

No – 13 2%

Yes – 18 5%

Were you successful?

Yes – 72 4%

What rate were you offered?

Decision pending – 14 4%

There was a considerable drop in the proportion of businesses applying for credit in Q4, with only 18.5% of surveyed SMEs doing so in the last three months of 2020. This represents a fall of 9.9 percentage points from Q3, when 28.4% of small businesses had made a credit request, which was itself down from the high of 33.9% witnessed in Q2. The figure remains slightly elevated compared to historic averages, with on average 13.8% of small businesses requesting credit in each quarter between 2015 and 2019. This suggests that firms are continuing to seek external support for their cash flows amidst the pandemic, though to a

much lesser degree than during the initial lockdown and its aftermath. Businesses’ access to credit in Q4 was characterised by slightly higher interest rates, with a much smaller proportion of requestees being offered a rate of less than 4%. While this was the case for 82.1% of those requesting credit in Q3, this figure had dropped to 74.7% in Q4. This was matched by a higher proportion of firms being offered rates in the 4%-4.99% category, as well as in the categories with rates exceeding 8%. This is perhaps reflective of greater risk sensitivity amongst lenders in a landscape of continued uncertainty.

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 AND AFFORDABILITY INDICES SLIP FROM RECORD HIGHS IN Q3

Having hit respective highs in Q3, both the credit availability and credit affordability indices slipped in Q4. The former fell by 6.5 points to reach -5.2, while the latter slipped by 6.7 points to reach -0.1.

Despite these falls, both indices remain considerably above their pre-crisis levels. Provision of easily accessible and affordable credit has been a key

government policy tool amidst the economic downturn in an attempt to provide short-term liquidity for businesses and better assist their survival. Commercial rates have been able to remain low as a result of the Bank of England’s historically low base rate, which has sat at 0.1% since March.

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

INVESTMENT OUTLOOK SLIGHTLY MORE MUTED IN Q4 THAN Q3

In a further symptom of businesses’ lesser degree of optimism in Q4 than in Q3, investment expectations were slightly more muted towards the end of the year. Q3 saw a greater proportion of firms anticipating a scale up of investment than a cut back, with the opposite being the case in Q4, albeit by a narrow margin. While 23.6% of respondents anticipate increased investment levels in the coming quarter, this is outweighed by the 24.2% expecting investment cuts. As such, the net balance of firms anticipating investment growth has returned to negative territory in Q4, as had been the case in Q1 and Q2.

As was also the case in Q3, manufacturing remains the sector with the most optimistic outlook towards near-term investment, with 28.0% of businesses anticipating increased investment levels in the coming quarter. A positive net balance figure is also

19:

previous quarter.

anticipated amongst businesses in professional, scientific and technical activities, with 20.8% of such businesses expecting to scale up their investment in the coming quarter, compared to just 17.0% anticipating a cutback. This greater inclination towards future investment can be explained by the relative resilience of the sectors amidst the pandemic, providing a greater deal of stability and financial means upon which to make investment decisions.

The weaker outlook for business investment aligns well businesses’ self-assessed growth prospects. Given that capital investment is largely conducive to growth, the symmetry between a weakening growth outlook and a weakening investment outlook illustrates consistency amongst businesses’ survey responses.

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

Figure

Percentage of small businesses expecting to increase and decrease capital investment over next quarter, compared with