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Productivity gap set to persist as seven in ten small firms hold back investment

The quarterly London Small Business Index (LSBI) confidence measure stands at -31 in Q2 2019, down 8 points compared to the last quarter. Such a sustained slump is a first for the index, which launched in 2010.

Small firms are struggling to expand, hire and raise productivity as political uncertainty leaves them increasingly hamstrung, according to the full SBI Q2 2019 report form the Federation of Small Businesses (FSB) released today. 

The considerable majority (68%) of London small firms are not planning to increase capital investment in their businesses over the coming quarter. The figure is at its highest since Q2 2017. According to the ONS, business investment fell for four straight quarters last year for the first time since the financial crash. 

Elsewhere, more than a third (36%) of London small firms say accessing appropriately skilled staff is now a major barrier to growth. The net balance of small businesses that are increasing headcounts – the proportion of those hiring new staff less the proportion reducing their team size – stands at a three-year low (-2%).   

Net migration from the EU fell to 74,000 in the year ending December 2018, down from 189,000 in the year ending June 2016. One in five (21%) small employers rely on staff from the EU.       

FSB London Chair, Sue Terpilowski OBE, said: “The political uncertainty mixed with the rising costs of doing business in the capital is having a firm impact on the investment intentions of small firms. There remains a stoicism with London businesses still keen to grow, many are running at under-capacity, but the uncertainty is creating decision-paralysis. We urgently need to see both prime ministerial candidates spell out their plans for supporting small firms and securing a pro-business Brexit.    

“A tight labour market and falling migration don’t help matters. It’s becoming harder and harder to find the right people to fill vacancies. With that in mind, we welcome the announcement of a Migration Advisory Committee review of future salary thresholds for those looking to make the UK their home.  We would also like to see the MAC review look into the possibility of a Shortage Occupation List for London that currently exists for the UK and Scotland.”

The latest SBI also finds that only one in seven (19%) small firms are applying for new credit. The figure is largely unchanged over the past two years, and is down two percentage points compared to Q2 2016. 

Nearly six in ten (57%) London small firms describe new credit as “unaffordable” – the highest proportion since Q1 2015. 

Fewer than one in five (15%) successful credit applicants are using new finance to expand their firms, down 10 percentage points compared to the same period last year.