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Small business confidence slumps, as hopes for coming months also take a dive

Confidence among small businesses has dropped significantly this quarter, and the self-employed are feeling particularly pessimistic about their prospects for the coming months, according to the latest Federation of Small Businesses (FSB) Small Business Index (SBI).

Amid ongoing Brexit uncertainty, fewer than one in three (29%) small firms expect their performance will improve over the next quarter. The UK SBI confidence measure stands at -1.7 in Q3 2018, down from +12.9 in Q2 2018.

This marks the third negative SBI reading since the wake of the EU referendum in Q3 2016. The SBI has not returned to the level seen in Q4 2015 (+21.7) at any point since.  

Close to one in three (27%) small exporters report falling international sales in Q3 2018, up from 19% in the same period last year. One in five (21%) expect this trend to continue in Q4, compared to 15% in Q3 2017.

Research published by FSB on Tuesday reveals that only one in seven (14%) small firms have started planning for a no-deal Brexit.  

The latest SBI also shows confidence among the self-employed (-18.4) falling to an all-time low. The Government recently announced that it is reneging on its promise to abolish Class II National Insurance Contributions (NICs) – a move forecast to cost sole traders an estimated £1 billion in the three years to 2021.

FSB National Chairman Mike Cherry said: “We haven’t seen a string of negative confidence readings like this since the years immediately after 2009.

“Small firms need some Brexit clarity before Christmas. Ultimately, we want to see a deal that works for all businesses – with easy cross-border trade, access to skills and funding streams all protected. The number one priority is ensuring the transition period that we’ve fought for is nailed down by the end of this year.  

“If we reach the Budget and things are still up in the air, we’ll be looking for additional financial support for smaller businesses as they prepare for life after March 2019. It’s worrying to see small exporters already reporting a drop in overseas sales over the last quarter.

“Confidence among the 4.8 million-strong self-employed community has plummeted. This Government needs to do some soul searching – a broken promise on Class II NICs, failure to take full responsibility for delivering a pensions dashboard and threats to the New Enterprise Allowance all have the self-employed once again questioning whether this administration is on their side.  

“The upcoming Budget is a decisive moment for this Government. Does it want to be remembered as an administration that backed sole traders, or one that was content to stifle their ambitions? That’s the question that Ministers should asking themselves in the weeks ahead.”

Close to three quarters (72%) of small businesses report that operating costs are rising in Q3 2018, up two percentage points compared to the same period last year.

A big proportion of firms cite labour (40%), utilities (33%) and rent (21%) as main causes of higher outgoings. A record 37% say that fuel is a main cause of rising operating costs.  

With employment levels at record highs, 65% of small firms have increased wages over the last 12 months, up from 61% in Q3 2017. The proportion awarding pay increases of 4% or more (28%) has hit an all-time high.

Amid an increasingly tight labour market, and fewer workers arriving from the EU, the proportion of small firms citing lack of appropriately skilled staff as a barrier to future growth has soared this quarter. More than one in three (34%) businesses cite reduced access to the right talent as an issue – the highest proportion since Q3 2015.

On Tuesday, the Migration Advisory Committee (MAC) published its wide-ranging report on the impacts of European migrants on the UK.  

Small retailers continue to report the lowest confidence level (-42) of any sector. Four in ten (43%) expect performance will worsen in Q4 of this year. Only one in six (16%) believe performance will improve.   

FSB National Chairman Mike Cherry added: “Small firms are crying out for more support when it comes to spiralling costs, especially those linked to property, fuel and employment.

“The fuel duty freeze – a vital lifeline for thousands of small firms, particularly those in rural areas – must remain in place.

“Small businesses now cite skills shortages as the second biggest barrier to future growth. With the employment rate at a record high, and the supply of talent from the EU increasingly restricted, we need to see those furthest from the labour market brought into our workplaces.  

“To make that possible, the Government must deliver on its promise of a National Insurance holiday for small firms who hire ex-forces personnel, the long-term unemployed and those with disabilities.

“Our small retailers are under the cosh like never before. Unless we see meaningful efforts to mitigate the effects of spiralling business rates, bank branch closures and reduced access to cash, the days of buzzing high streets could be numbered.”