Small business confidence has dipped but the labour market remains strong as UK SMEs continue to hire.
The SME Health Check Index, published by CYBG in partnership with the Centre for Economics and Business Research, is a quarterly measure of performance and outlook for UK SMEs. The latest findings show that the Index fell by 6.9 points to 41.9 in Q2 2019, as economic and political uncertainty continued to weigh on business confidence.
The reduction in the headline figure has been driven by falls across the majority of indicators comprising the Index, including the first quarterly contraction in GDP in Q2 since the final quarter of 2012. However, the study reveals a mixed picture, with continued resilience in the labour market and encouraging signs of business diversity.
The SME Health Check Index also highlights key regional variations. In the past quarter, eight of the 11 UK regions measured saw declines. London and Yorkshire & the Humber recorded the biggest regional reductions - primarily driven by falls in GDP and business confidence, as well as an increase in SMEs operating below capacity. However, Scotland and the South West of England both recorded significant Index increases.
The Index has also examined how the diversity of UK SMEs has enhanced their ability to deal with ongoing political and economic uncertainty. The study has looked at companies from a range of perspectives - including diversity in products, customers, suppliers, geography and workforce composition - in order to assess how far companies have protected themselves against disruption or shocks.
The most diverse business populations are in the West Midlands and Yorkshire & the Humber, which have an established presence in manufacturing and construction as well as in the services sector. London leads the way when it comes to product complexity and workforce diversity, with only one in six SMEs in the capital reliant on a single product for most of their revenues.
"While on the surface things may look a little gloomy, cause for optimism can be found," said Gavin Opperman, group customer banking director at CYBG. "The labour market has remained resilient, with SMEs continuing to hire, and wages continuing to grow, despite the tougher conditions. Further, an analysis of workforce composition, customer base and supplier relationships has revealed some encouraging insights on SME diversity across many parts of the country, indicating a good ability to handle sudden change or shocks."
However, business groups are calling on the government to do more to support SMEs as the prospect of a no-deal Brexit looms large. Suren Thiru, head of economics at the British Chambers of Commerce (BCC), said: "Although there was a rise in GDP between June and July, the zero-growth recorded on the underlying three-month measure points to an economy under pressure from uncertainty over Brexit and weakening global economic conditions."
Mike Cherry, chairman of the Federation of Small Businesses (FSB), said: "Uncertainty has thrown sand in the wheels of small businesses, making it impossible for us to plan, hire and grow. The very prospect of a sudden, chaotic no-deal Brexit in less than eight weeks' time is proving enough to have a sustained chilling effect on output."
The FSB is calling on the government to have an Emergency Brexit Budget that will "take the heat off employers, support our high streets and push back premature tax changes".
Written by Rachel Miller.