It should come as no surprise that small business confidence has remained mired in negative territory in recent times, in the wake of the coronavirus pandemic and the recent challenges posed by rampant inflation.
However, SMEs and the markets received some positive news in the first quarter of this year, as confidence levels among small businesses recovered strongly when compared to Q4.
Despite this, SME confidence remains in slightly negative territory, while it’s still down considerably when compared to the first quarter in 2022. But what exactly do the recent numbers say, and how will stubborn inflation rates weigh on confidence going forward?
How has the Small Business Index (SBI) Fared in Q1?
According to the most recent data compiled by the Federation of Small Businesses, the UK Small Business Index (SBI) rose to -2.8 during the first quarter of this year.
While this remains in negative territory, the Index actually rose by 43 points when compared to the previous quarter (Q4 2022). This increase was largely driven by future optimism, with two in five SMEs reporting that they expected their sales to increase through quarter two.
Despite the overt positivity surrounding these headline numbers, the SBI remains a hefty 18.1 points lower than the same quarter last year (when the reading was a relatively healthy 15.3).
At the same time, SMEs on these shores remain encumbered by ongoing uncertainty and some significant economic concerns.
More specifically, a further two in five smaller businesses saw their revenues fall through Q1, while only 33% saw an increase in this metric. What’s more, a record 92% of SMEs reported that their operating costs continued to rise during the quarter, and remained significantly higher than during Q1 in 2022.
This hints at the ongoing impact of inflation, which remains particularly stubborn in the UK and continues to squeeze profit margins from both ends.
The Impact of Inflation on Consumer Confidence
Certainly, inflation in the UK remains a serious concern for both SMEs and their customers, while this particular macroeconomic factor appears to be particularly stubborn on these shores.
To this end, the Consumer Prices Index (CPI) rose by 8.7% in the 12 months through April 2023. While this headline inflation number actually fell by double digits and a marker of 10.1% during the previous month, it remains far higher than the central bank’s target of 2% and is depreciating at a much slower rate than comparable economies.
For example, the rate of inflation in the US is now just 4.0% and much closer to the Federal Reserve’s target, while it’s interesting to note that the Joe Biden administration has implemented a similar quantitative easing strategy and sought to hike interest rates as a way of combating the cost of living.
The same can be said for much of Europe and many EU member states, but deposit this, the UK retains the highest rate of inflation of all G7 nations. What’s more, the nation’s core inflation rate of 6.8% continues to rise, whereas the opposite is true in most developed economies.
There are several factors behind this, including the impact that Brexit and the pandemic have had on driving up the cost of materials and labour. Farming and manufacturing SMEs have been particularly hard hit in this respect, and this issue shows no sign of being resolved any time soon.
Regardless, SMEs are seeing operational costs and the price of goods increase incrementally, while international companies are facing further pressure as inflation continues to weigh on the value of the pound.
Certainly, the pound continues to lose ground against both the Euro and the Dollar, and while forex traders can capitalise this trend through speculative strategies such as scalping and the use of forex arbitrage software, SMEs are not so fortunate as they tend to hold specific amounts of different and corporeal currencies.
At the same time, households are seeing their disposable income levels become increasingly squeezed, by the combination of high inflation and increased mortgage repayments (as the base rate of interest continues to soar). So, small business revenues remain relatively stagnant, and while this may change in the next quarter, profitability remains a distant dream for many SMEs in the current climate.
The recent upturn in SME confidence highlights the resilience that exists in the small business community, but it has yet to be seen whether it also heralds a return to some form of economic prosperity.
For now, the short and medium-term future looks uncertain for most small businesses, especially as the Bank of England (BoE) struggles to control inflation and firm’s see their costs and earnings impacted negatively as a result.