Hopes of a small-business-led economic recovery from the pandemic may be under threat with cost pressures and labour shortages stymying investment plans and hampering economic development and the first fall in employee numbers for over a year recorded by small businesses.
The report found the combined proportion of small firms that predict that they will stay the same size (38.7 per cent) or downsize or even close their business (14.7 per cent), at 53.4 per cent, outweighs the 46.6 per cent that predict they will grow in the coming 12 months.
The results differed by sector, with a better outlook for businesses in the information and communication sector, where 62.9 per cent of businesses expecting to grow in the next year, compared with only 33.9 per cent of wholesale and retail firms, and 34.9 per cent of hospitality sector businesses.
Small firms’ anaemic growth predictions coincided with the highest-recorded proportion of firms saying their costs are higher than a year ago, at 89.0 per cent, and with the highest level of producer price inflation for four decades in June.
Fuel (cited by 64.2 per cent) and utilities (63.5 per cent) were the most mentioned causes of this increase in costs, both up notably from the first quarter (60.1 per cent and 58.0 per cent respectively), and far higher than this time last year (Q2 2021: fuel cited as a cost increase factor by 25.9 per cent, and utilities by 27.6 per cent).
Of those businesses that expect to grow in the coming year, two-thirds (65.1 per cent) cited the domestic economy as a potential barrier to expansion, a figure which has risen from 58.6 per cent in the Q1 report.
Lack of access to appropriately skilled staff was also noted as a significant worry, mentioned by 33.9 per cent of businesses that expect to grow as a limiting factor. With ONS statistics showing there were 1.3 million vacancies in Q2, many firms are not able to find the staff they need, putting normal operations and usual opening hours – let alone plans to grow – in question.
Yet Q2 2022 also saw more small businesses reporting a fall in employee numbers than growing their payrolls, the first time this has happened since Q1 2021. One in 10 small businesses (10.8 per cent) grew their number of employees over the previous quarter, but were outnumbered by the one in seven (14.4 per cent) that saw staff numbers fall over the same period.
More positively, a net balance of 7.2 per cent of respondents anticipate that their employee base will increase in size in Q3, although this is around half the figure that predicted the same ahead of Q2 (14.5 per cent), and many may find it tricky to get the people they need on board.
Martin McTague, FSB’s national chair, said the fall in GDP in the second quarter and the record-high inflation figures showed the scale of what small businesses are up against.
“Our second quarter Small Business Index has uncovered warning signs in many different indicators, from overall confidence to staff numbers and growth aspirations,” he said.
“Longer-term, those hopeful of solving the UK’s long-running productivity puzzle will not find much cause for cheer in this report, with small businesses held back from growing and investing by numerous factors.
“A healthy business ecosystem requires businesses of all sizes to be able to realise their ambitions – from one-person start-ups with a great idea, through the small and medium-sized businesses which form the bedrock of the economy, right up to the largest companies, who rely on countless smaller suppliers and service providers.
“With our research indicating that smaller firms’ intentions to grow are muted at best, with businesses planning to grow outnumbered by those expecting to stay the same size, shrink, or even close their business, a key driver of economic recovery is threatened.
“Inflation is higher than at any point for the last four decades, and is also acting as an inhibitor to investment – machinery, parts, software, tools, rents, and employment and operating costs in general are all increasing in price more rapidly than small businesses can run to keep up. It’s a toxic recipe for the future health of the economy.
“If the next Government wants to be able to level up the country, small business considerations must be at the heart of its thinking. Our members are looking for concrete help.”
