However, 2024 seems to be promising a little light at the end of the tunnel. Between February and March 2024, insolvencies fell by 17 per cent, and, in April 2024, the inflation rate decreased to 2.4 per cent – hitting its lowest point since May 2021.
Consequently, small businesses are seeing some growth. It is expected that, by 2025, there will be an extra 342,000 SMEs in the UK, and SMEs’ overall turnover will increase by £160 billion.
However, growth is not taking place evenly across all sectors. Here, we ask the experts which sectors are expanding fastest, then consider what small businesses might expect next.
Insights into small business performance by sector
In March 2024, the fastest growing sector in the UK for SMEs was services, reports the NatWest SME PMI Tracker.
The Tracker measures each sector according to a business activity index, where 50 indicates stasis, above 50 shows growth and below 50 demonstrates decline. Services scored 53.2, and participants attributed the uptick to greater demand.
“As inflation is coming down to more normal levels, businesses specialising in retail, food and entertainment are seeing an upturn,” says Jonathan Cooper, founder and director, The Directors Helpline.
Spending in cafes, pubs, restaurants and takeaways increased by 10 per cent over the past year, according to Circana. Overall, small businesses providing food services and accommodation saw a 26 per cent boost in turnover in 2023, reports the Department for Business and Trade.
Further, in 2023, retail sales reached £510 billion, which was a 3 per cent increase on 2022, according to a House of Commons Library report published in May 2024.
The second-fastest growing sector for SMEs in March 2024 was manufacturing, with a business activity index of 51.4. NatWest noted a sustained rebound, following the downturn of late last year. Participants attributed this to greater demand and greater promotional activity.
“According to our latest analysis of applications for personal guarantee insurance in Q1 2024, the strongest demand we are seeing is in manufacturing, tech services and construction,” says Todd Davison, managing director, Purbeck Personal Guarantee Insurance.
Insights into small business performance by region
Given that so many people are glued to their phones, it might come as a surprise that, in London, bookshops are growing faster than any other type of small business. Between 2017 and 2022, they increased by 217 per cent, reports Tyl by NatWest.
In the same period, takeaways dominated in Manchester, increasing by 506 per cent; clothing and textiles ruled in Birmingham, increasing by 638 per cent, and garden centres attracted buyers in Edinburgh, jumping by 287 per cent.
“Cardiff has become a major fashion capital, and Leeds and Portsmouth are becoming the UK’s most important cities for bakeries and garden centres,” says Lee Murphy, managing director, The Accountancy Partnership.
What to expect next
“As the UK economy continues to strengthen – and based on conversations my team and I have been having with SME directors from across the UK – I expect retail to increase steadily and construction to also improve,” says Cooper.
Construction will see 8 per cent growth in 2024, followed by 7 per cent growth in 2025, according to the Glenigan Construction Industry Forecast 2024-2025.
Another sector to watch is IT.
“Revenue in the IT services market is projected to reach £82.8 billion in 2024,” says Davison.
More generally, both AI and an increased interest in local services will likely shape the way small businesses operate.
“The hot topic is AI, and it will be interesting to see how this technology is [used] by SMEs – it’s unlikely any robots will be serving us bagels anytime soon, however,” says Murphy.
“Many new clients are listing ‘miscellaneous services’ as their business. Could this mean we are seeing a huge increase in ‘side hustles’? Perhaps the trusty local handyman is becoming a cottage industry.
“We’re certainly seeing a societal shift towards local services and, with 5.5 million SMEs in the UK, [we hope] many more inventive enterprises will emerge to tackle the decline in public services and high street brands we’ve seen in recent years.”
Opportunities for accountants
The data suggests that, for accountants looking to expand their practices, opportunities should be considered according to sector and region.
Demand for accountants with expertise in services and manufacturing is likely to grow across the board. Meanwhile, accountants who operate locally could benefit from focusing on high-performing sectors in their area.
It is also important to remember that, although the UK has seen some economic improvement, high living costs are still creating stress.
“While confidence is elevated, businesses aren’t out of the woods yet,” says Cooper.
“The cost-of-living crisis is still very much present and is expected to last until the end of the year.”
