Small-business confidence in negative territory again

Rising energy costs have been the biggest concern for small firms in the third quarter of 2022 according to the report with the increase in costs damaging margins and plunging confidence to its lowest ever outside of lockdowns.

Businesses in accommodation and food services saw their confidence reading plunge from -29.1 in the second quarter to a staggering -67.5 in the most recent survey, as consumer confidence fell to new record lows and staff shortages persisted for many firms.

“The appalling reading for the hospitality sector is also a reminder that businesses in sectors outside those officially designated as ‘energy-intensive’ will need confidence that the rises in their utility bills will be tempered,” said FSB national chair Martin McTague.

“A small café whose coffee machine is too expensive to run, a boutique hotel which needs to heat rooms for guests, or a bakery which can’t afford to turn the ovens on are affected by rising bills just as much as a steelmaker or a chemical plant.”

Inflation is also impacting the sector with the proportion of respondents saying that prices were higher than in the same quarter last year, which matched nearly exactly the Q2 finding for this, at 88.7 per cent (Q2: 89.0 per cent).

Mr McTague said there were economic warning signs in many other areas, too, from a net balance of -4.4 per cent of small firms reporting a rise in employee numbers over the quarter — the lowest such reading since the second lockdown in Q4 2020 — to concerns about consumer demand rising to become the second-most cited barrier to growth, cited by 32.9 per cent of respondents, behind concerns about the domestic economy (60.6 per cent).

Revenues generally suffered over the period and those reporting revenue growth or a flat performance were outnumbered by those noting a drop in revenues, with a net balance of -11.8 per cent.

Hopes for the future look to be subdued, with small businesses expecting to see their revenues increase over the coming quarter outweighed by the proportion expecting to see a drop-off (30.8 per cent expect revenues to increase against 40.6 per cent who expect them to decrease).

In marginally better news, the net proportion of small businesses aspiring to grow over the next 12 months grew slightly, from 46.6 per cent in Q2 to 47.4 per cent in Q3, while the corresponding figure of those expecting to contract fell very slightly, from 14.7 per cent to 14.1 per cent over the same period.

However, both readings are notably worse than those registered in the same quarter last year (53.1 per cent expected to grow and 11.2 per cent expected to contract), showing how small businesses’ expectations have deteriorated over the previous 12 months.

The report revealed that the domestic economy is the most commonly cited potential barrier to growth among businesses expecting to expand over the coming year, being cited by 60.6 per cent of respondents. There was an increase in the share of businesses citing consumer demand, reaching 32.9 per cent, reflecting expectations that consumer demand will weaken significantly as a result of falling real household incomes.

The share of small businesses applying for credit rose to 12.6 per cent in Q3, from 11.5 per cent in Q2. This came despite a near doubling of the Bank of England’s base rate over the quarter and could point to a growing need for businesses to cover cost shortfalls.