London small-business confidence drop reflects nationwide trend

The index has fallen sharply in the last quarter and currently stands at -33 as of Q3 2022. In Q1 2022, confidence measured at +43, before slipping to -14 in Q2.

The further fall in Q3 may reflect a continuation of economic uncertainty, both in the UK and abroad, with persisting inflationary pressures.

London’s confidence level is similar to the countrywide average of -36 in Q3. Some regions display even more significant drops in confidence, with the South West returning a level of -47. The present issues feeding into these low confidence levels are clearly widespread and represent a scaling back of the initial positivity seen after the ending of COVID-19 lockdowns.

And although the data showed that in Q3, 33 per cent of London small businesses reported an increase in profit, 43 per cent reported a decrease.

London’s net balance figure of -11 per cent in Q3 closely reflected the reported countrywide average profit (-12 per cent in Q3). This represented the lowest net profit figure in London since Q1 2021, when it was -15 per cent.

Other regions have reported even lower profit performance, however, with the East Midlands returning a net score of -32 per cent in Q3. The West Midlands is the strongest performing region according to this metric, with a net score of 6 per cent. The outlook for future revenue is marginally positive in London (net score of 1 per cent). This is the most positive outcome, compared to pessimistic results from other UK regions such as the South West (-19 per cent) and Yorkshire and the Humber/North East (-14 per cent).

A significant proportion of London businesses do expect a further decrease in profits for the coming quarter (37 per cent). This continued a trend of falling faith in profit outlooks; in Q1, 20 per cent of London small businesses expected profit decreases, and in Q2, this had risen to 26 per cent.

Around 13 per cent of London businesses reported increased employment levels over the last three months, which aligns with predictions. However, the reported 17 per cent of businesses decreasing headcount displayed a greater-than-expected loss of staff in the region.

Importantly, the majority — 63 per cent — of small businesses did report no change in headcount during Q3.

For the next quarter, 17 per cent of businesses expect an increase, and 10 per cent of businesses expect a decrease, in headcount.

Two-thirds of businesses (66 per cent) increased salaries over the previous 12 months that is notably larger than the 53 per cent of businesses reporting increased salaries in Q2 2022. Around 61 per cent expect to see salary increases in the next quarter, and 12 per cent expect salaries to fall.

Rowena Howie, London policy representative for the Federation of Small Businesses, said the latest London Small Business Index showed that confidence is drifting in the wrong direction.

“The lack of clear and consistent business friendly policies, combined with the political and economic conditions, are putting huge pressure on small businesses,” she said. 

“We must concentrate on what is required to keep small businesses functioning, and the benchmark must be continued access to finance. Businesses will not want to take out more debt at a time of rising interest rates and will be struggling to service the existing debts accumulated during the Covid crisis.

“Our financial institutions must be on their side through maintaining positive relations and an understanding manner. 

“The fact that investment intentions remain strong is something we must build on. We must make it easier to invest in skills in small businesses by minimising bureaucracy and creating fiscal incentivisation, most notably through Apprenticeship co-finance support. 

“FSB London are also keen to see action taken to support small businesses who will be impacted by the extension of the Ultra-Low Emission Zone in August 2023. FSB recognises the climate emergency and the commitment to move to net zero — but the Mayor and Department for Transport must support the small business community through education and incentive approach to make greener decisions, discouraging non-essential business private vehicle journeys, and not to punish essential business journeys at this time of economic crisis.”