FSB Voice of Small Business Index Quarter 2, 2014
FSB Voice of Small Business Index 2014 Contents Q2 snapshot 3 FSB National Chairman 4 Economist s view 5 Regional Small Business Indices 9 Sector Small Business Indices 11 Credit 14 Revenue and profitability 18 Exports 20 Costs and inflation 23 Capacity 26 Employment 28 Growth aspirations and challenges 30 Investment 33 Method.......................... 35 2
5% Voice of Small Business INDEX Q2, 2014 www.fsb.org.uk New record high for small business confidence shows UK private sector returning to strength 50 40 30 2010 2011 2012 2013 2014 1% 0.8% 0.6% 20 10 0-10 -20-30 0.4% 0.2% 0% -0.2% -0.4% -0.6% FSB Small Business Confidence Index Quarter-onquarter UKP GDP Growth 33.3% SKILLS Five times more small firms expect to take on staff compared to three months ago A third of small firms say skills shortages are a barrier to growth Increase in small businesses applying for credit compared to 12 months ago 3 One in four firms expect to invest in next 12 months up from 15.8% a year ago
FSB Voice of Small Business Index 2014 FSB Voice of Small Business Index John Allan, FSB National Chairman Building on the momentum seen in recent quarters, our Voice of Small Business Index (SBI) now stands at an all time high. What lies behind this headline picture is particularly encouraging as our members optimism is translating into intentions to invest, employ and export. This provides further momentum for the recovery until the end of the year. The rising optimism is also being seen across the country and across sectors, with significant year-on-year improvements in most areas. The results show this has been supported by a more benign inflationary environment for most factor inputs, with members reporting a sharp decline in fuel costs as a significant cost factor in their businesses helped by falls in crude oil prices and the decision of the Chancellor not to increase fuel duty at recent Budgets. As I m sure policymakers will, we draw particular encouragement from the employment, investment and export data. Though starting from a low base, what is now a sustained picture of rising investment provides hope that a more balanced recovery is beginning to take hold. A net balance of more than a quarter of our members expect to increase their investment in the next 12 months, up from 15% the same time last year. On the exporting front, a similarly strong forward looking picture emerges, with more than 20% of our members expecting their exports to increase in the next three months. And hiring intentions among members continue to be robust, again demonstrating the fundamental role small businesses have in job creation. Overall, a net balance of more than one in 10 of our members expect to take on additional staff in the coming months to meet rising demand. Despite this buoyant outlook, challenges are emerging to members growth intentions. Most notable is skills, with around 30% of members reporting this as the third highest hindrance to growth compared to 25% in the previous quarter. At this stage of the recovery, this must be a cause for concern and once again underlines that skills and our relatively low levels of human capital compared to our competitors remain one of the main long term structural weakness of the UK economy. This is why the FSB wants to see reforms to our apprenticeship system with businesses put at the heart of those reforms, and for our schools to be better connected with the business community. Too many school leavers still lack the basic employability skills our members require so they can function straightaway in the work environment. As a country, we must address this issue once and for all. The other factor to highlight from this and recent surveys is the shifting picture around access to finance. It is encouraging credit conditions seem to be easing, and more members are having these applications for finance approved by their banks though I would note the success rate still remains below 50%. Clearly more needs to be done to raise that success rate. We will therefore continue to encourage the banks to work with members to raise those chances as well as working with them on improving referrals to other providers who may be able to help as set out in this year s Queen s Speech. What is also beginning to come into focus from our surveys is that despite the improving economic outlook, increasingly members are not turning to their banks for finance:16.2% applied for credit in the past three months, down from 19.8% at the same point a year before and from 22.7% in Q2 2012. This may be a reflection of improving cash flow, meaning members can use their own resources to fund their growth intentions. But it may also indicate the start of a structural shift in the market, where small firms are increasingly looking to non-bank providers to meet their needs and so introduce a dose of much needed competition in the market. As long standing advocates of a more diverse market for our members, it will therefore be an area we will be monitoring closely as the year progresses. 4
www.fsb.org.uk Economist s View Further signs of a buoyant recovery continuing in 2014 came this quarter from the latest SBI. New record highs for small business confidence are welcome news, illustrating the return to strength for the UK s private sector. A particularly encouraging emerging trend is how the economic recovery is now feeding through to households. Employment growth is at its fastest in 25 years, unemployment is rapidly falling, and wage growth is slowly starting to rise now broadly in line with inflation, something not consistently seen since 2008. The latest findings from small businesses suggest that this pattern is likely to continue, as a huge number of firms plan to increase their staff headcounts over the next quarter. However, the strengthening labour market is starting to raise some flags that the Government will need to think hard about during the next parliament. Skills shortages are becoming more prevalent, with almost a third of small firms reporting this factor as a potential barrier to achieving their growth aspirations. This figure rises even higher for firms in the construction, computer services and manufacturing industries, suggesting that the UK isn t doing enough to provide these skills. As unemployment comes back to pre financial crisis levels, this risk is only likely to increase, holding back the ability of businesses to expand and hindering economic growth. Those concerns apart, these latest results give much optimism for UK economic expansion this year. Although risks remain on the horizon, the nation s small businesses look set to spur on the economy to new highs. Rob Harbron, Senior Economist, Cebr 5
FSB Voice of Small Business Index 2014 Executive summary Key findings this quarter: The headline SBI measure of confidence rose again this quarter, reaching +39.7. This is well up from +15.9 a year ago, taking the Index to a new record high. Year-on-year gains to confidence were seen around the whole UK, although confidence remains relatively weak in Wales and the North West. Professional services and technology continue to display the strongest optimism, with notable year-on-year gains to confidence seen around much of the rest of the economy. Turnover growth has now been reported for a full year by a net balance of firms, with more expecting further increases over the next quarter. Profitability growth is also expected by more firms for the coming three months. Export growth is expected for the next three months by a net balance of 21% of small firms, helping to boost overall sales expectations. Three in 10 firms find that their main barrier to exporting is finding overseas customers, while just 20% of businesses report that government support for exporting is easy to access. Helping profitability growth, inflation on operating costs is on its way down, as the global cost of inputs such as energy and oil fall back in sterling terms. With turnover expected to rise and business conditions to strengthen over the next three months, small firms expect spare capacity to diminish. This is an important finding, as spare capacity is a key metric watched by the Bank of England to influence their monetary policy decisions interest rate rises will only commence once enough slack has been taken up. In addition, firms are expecting to increase their productive capacity by investing in more staff over the next three months and more capital over the year ahead. Success rates for small businesses applying for credit are on the way up, and average interest rates offered for credit are falling. However, the number of firms actually applying for credit is on the way down, mirroring the latest findings from the Bank of England showing net lending to SMEs in negative territory. One risk to growth prospects comes from skills shortages, as more firms are reporting finding appropriately skilled workers to be a barrier to achieving growth aspirations. This is particularly the case in the construction and computer consultancy sectors, and less so in the retail and hospitality sectors. 6
www.fsb.org.uk UK macroeconomic overview UK economy surpassing pre-crisis peak, but output per worker remains down The UK economy looks set to expand past its pre-financial crisis peak in 2014, as the second estimate of Q1 2014 GDP from the Office for National Statistics (ONS) showed output remaining just 0.6% below the Q1 2008 maximum. Forward-looking indicators suggest that the pace of growth seen in Q1 (a 0.8% quarterly expansion) has been maintained in Q2 2014, suggesting that the peak could be surpassed as early as this quarter. The latest estimates showed quarter-on-quarter expansion across the three main industrial groupings, with services output growing by 0.9% and production by 0.7%, while output in the construction sector returned to growth, at 0.6%. Consumer spending continued to contribute significantly to growth, with spending rising by 0.8% in Q1 alongside an uptick in net lending. Total capital investment also made a notable impact, rising over the quarter by 2.2%, within which business investment increased by 2.7%. These findings are encouraging for the UK s longer term growth prospects, as investment leads to a more productive economy. In addition, this source of growth helps to move the economy away from over reliance on domestic consumption. Continued economic expansion is feeding rapidly through into the labour market. The three months to April of 2014 saw the fastest year-on-year growth in employment in 25 years, while the unemployment rate fell back to 6.6%, the lowest since late 2008. As well as falling unemployment, underemployment is also on the way down. The share of people working part time only because they cannot find full time work stood at 17.5% in the three months to April 2014, down from a high of 18.5% in mid-2013, although still well above the pre financial crisis lows of closer to 7%. However, despite this strengthening of the labour market, pay growth remains a weak spot. Average earnings continue to rise at a slower pace than inflation and remain around 8% lower in real terms from the highs seen in early 2008 highlighting how the recovery still has some way to go before it can truly be called a recovery. This is also illustrated by forecasts for UK GDP per capita. Figure 1 below shows that although total UK GDP is likely to surpass its pre financial crisis peak in 2014, GDP per capita is not expected to reach a new all-time high until 2016 or 2017. In this sense, the downturn will have lasted for the best part of 10 years. As a result, although calls for the Bank of England to start raising interest rates are increasing in volume, markets expect the rates will remain on hold at least until late 2014 or 2015. Much spare capacity still remains in the economy, and the Bank has stated that productivity will need to be rising consistently before monetary policy can be tightened. 120 115 110 105 Figure 1: UK GDP and UK GDP per capita, indexed 2007 = 100. Calculations based on IMF forecast. 100 95 90 85 80 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 UK GDP UK GDP per capita 7
FSB Voice of Small Business Index 2014 Small Business Index Small business confidence reaches new highs The SBI, a measure of confidence in business prospects for the coming three months, climbed to a new high in Q2 2014, reaching +39.7. This is the highest score since the Index began in 2010, surpassing the previous record of +35.7 in Q1 2014. Optimism among small businesses has been rising year on year now for more than two years, with the latest increase placing the Index well above the score of +15.9 seen at the same point in 2013. Within the headline results, half of small firms (47.5%) expect business conditions to strengthen over the next quarter, compared to just 13.8% expecting deterioration. These encouraging findings from small businesses suggest that the UK economy will continue on its current positive growth trajectory in 2014 and could reach the fastest annual rate of expansion in years. The Bank of England expects GDP to rise by 3.4% in 2014 as a whole, in line with that last seen in 2007, while the IMF expects the UK to grow faster this year than any other country in the G7. As small businesses (those employing fewer than 50 workers) make up almost half of total private sector employment, confidence among these firms will be an important factor in helping to bring these economic forecasts to a reality. Figure 2: The FSB SBI 1 : small business prospects over coming three months 50 40 30 20 18.0 15.9 10 6.7 6.3 2.8 0.3 2.2 1.3 0-3.6-9.1-10 -4.5-5.6-20 -13.2-24.5-30 Figure 3: Year-on-year change in the FSB SBI 50 40 30 20 18.8 14.6 38.0 27.2 29.4 23.7 10 0-10 -20-2.5-5.5-11.3-11.3-4.6 1.0 4.6 4.1 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Source: FSB- RbD Voice of Small Business Panel Survey 39.7 33.5 35.7 21.6 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Source: FSB-RbD Voice of Small Business Panel Survey 1 The SBI is a weighted index of the responses to the question: Considering your overall business performance, and ignoring any normal seasonal variations at this time of the year, how do you view business prospects over the next three months, compared with the previous three months? The share of firms reporting much improved are given the following weightings: +2, slightly improved +1, approximately the same 0, slightly worse -1 and much worse -2; the SBI is derived from the sum of these factors. 8
www.fsb.org.uk Regional Small Business Indices Every region and nation has seen a significant improvement in their outlook over the past year, with confidence levels well up in Q2 2014. 9
FSB Voice of Small Business Index 2014 Strong confidence gains around the UK The latest SBI results highlight how the business environment is now improving around the whole of the UK. Every region and nation has seen a significant improvement in their outlook over the past year, with confidence levels well up in Q2 2014 on a year before. The strongest confidence readings this quarter come from the North East. Positive readings from the region s small businesses are good news for the local economy and labour market in the coming months, as the region continues to have the highest unemployment rate of anywhere in the UK. At the other end of the scale, confidence in Wales and the North West has also strengthened year-on-year, but remains below Index levels around the rest of the UK. While it is encouraging that business conditions look to be improving, Wales has generally had one of the lowest Index readings each quarter since the series began in 2010, and readings from the North West have been steadily slipping further behind other parts of the UK over the past few years. The opposite is true for areas such as the South East and East of England, where confidence levels among small businesses have generally been higher than anywhere in the UK since the series began. For a long term recovery that is balanced between the South and the rest of the UK, a sustained uptick in business confidence in the North will be needed. However, regions in the North of England and the devolved nations may be disproportionately affected by government cutbacks in the coming years, a factor that will weigh down on the medium term outlook. The OBR projects that 700,000 government employees will be lost between 2013-14 and 2018-19 and regions such as Wales have the highest dependencies on public sector employment. Almost one in four workers in Wales in Q4 2013 (24%) were employed by the state, so a strong private sector performance will be needed to help offset cutbacks. 70 60 Figure 4: FSB SBI - regional variation in small business prospects over coming three months 50 40 30 20 10 0 Wales North West W. Midlands Yorkshire London South West E. Midlands South East England Scotland Eastern N. Ireland North East Q2 2013 Q2 2014 Source: FSB-RbD Voice of Small Business Panel Survey 10
www.fsb.org.uk Sector Small Business Indices Small businesses in the computer and related activities sector are reporting encouraging levels of optimism, with a SBI score of +56. 11
FSB Voice of Small Business Index 2014 Professional services and technology continue to lead optimism This quarter, confidence among small businesses is up on a year ago in all sectors of the economy except for the leisure, sports and entertainment sector. Optimism is particularly buoyant in the business services sector, with a SBI reading of +61, following a strong upward trend from just +10 in Q3 2012. These latest findings come as the latest results from the ONS show rapid growth in professional services such as legal, accounting, management consultancy and engineering, which together saw economic output rise by 6.7% in the year to Q1 2014. Even faster growth of 12.9% was seen in the administrative and support services sector. Both these growth rates compare to an economy-wide year-on-year expansion of 3.1%. Likewise, small businesses in the computer and related activities sector are reporting encouraging levels of optimism, with a SBI score of +56. Data from the ONS on the computer programming and consultancy sector also shows faster growth than across the economy as a whole, with output rising year-on -year by 3.8% in the first three months of 2014. However, confidence levels have fallen back among small businesses in the leisure, sports and entertainment industry, with a SBI reading of -2 this quarter, compared to +3 at the same point a year ago. With UK average weekly earnings still struggling to rise in real terms, spending on non-essential goods and services such as sports and entertainment remains under pressure, with further confirmation from the retail sector which posted the second lowest reading. These results mirror the latest consumer data from the ONS which shows that total expenditure on recreational and cultural services, including sports matches, cinemas and theatres, fell back year on year in volume terms in the second half of 2013. Although wages are expected to return to real terms growth in 2014, providing additional discretionary income for consumers, small businesses in the sector still see tough trading conditions for the next three months. 12
www.fsb.org.uk Q2 2014 Q2 2013 Sector Business services Computer and related activities Personal services Score 61 56 53 11 20 32 Figure 5: FSB SBI by sector small business prospects over coming three months Financial services 51 42 Manufacturing 48 21 Real estate activities 45 33 Construction and building related activities 45 16 Transport and activities related to transport 43 4 Health and social work 40 14 Wholesale trade 40 26 Creative services 35-3 Hotels, restaurants, bars and catering 35-1 Other 34 16 Education 34 7 Agriculture, forestry, fishing 34 15 Sale, maintenance and repair of motor vehicles 19 16 Retailing 16-10 Leisure/sports/entertainment -2 3-20 -10 0 10 20 30 40 50 60 70 Source: FSB-RbD Voice of Small Business Panel Survey 13
FSB Voice of Small Business Index 2014 Credit 47.2% of business have been successful applying for credit, up from 42.2% 12 months ago. 14
www.fsb.org.uk Loan application success rates continue to rise Have you applied for credit in the past three months? No 83.8% Yes 16.2% Figure 6: Credit applications and interest rates offered Were you successful? No 39.3% Yes 47.2% Decision pending 13.6% What rate were you offered? 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% <4% 4% - 4.99% 5% - 5.99% 6% - 7.99% 8% - 11% >11% Source: FSB-RbD Voice of Small Business Panel Survey Q2 2013 Q2 2014 Success rates for small businesses applying for new bank credit continued to increase this quarter, with 47.2% of applicants being granted financing. This is up from 42.2% at the same time a year ago, following a steady upward trend. In addition, the rates being offered to successful businesses have fallen back which is likely to be a reflection of the effects of the Funding for Lending scheme feeding through to loan pricing. This quarter, 42.3% of successful applicants were offered a loan with interest of 4% or less, well up on the share a year ago. At the same time, fewer than one in 20 successful applicants were offered a loan with interest rate of 11% or higher, down from a year ago. This suggests either that credit costs are falling generally or that the types of loans being applied for are changing for instance, an overdraft facility may well incur a higher interest cost than a longer term business development loan. 15
FSB Voice of Small Business Index 2014 However, the upward trend in success rates comes alongside a general downward trend in the proportion of small firms applying for credit just 16.2% applied for credit in the past three months, down from 19.8% at the same point a year before and from 22.7% in Q2 2012. Again this could suggest that with improving business conditions and strengthening finances, small firms are no longer requiring access to short-term credit options to provide cash-flow. It may also reflect an increasing use of non-bank alternatives for their financing needs. The picture is however consistent with the latest figures from the Bank of England and the Treasury s flagship Funding for Lending scheme showed that net lending to SMEs fell by 700 million in Q1 2014, despite the amendment to the scheme that skewed incentives towards lending to smaller enterprises in 2014. Figure 7: Proportion of small businesses successful in bank credit (e.g. loan or overdraft) application in the past three months 55% 50% 45% 40% 35% 30% Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Source: FSB- RbD Voice of Small Business Panel Survey 16
www.fsb.org.uk Credit affordability still poor for half of small firms However, despite falling average interest rates offered to small firms and the refocusing of the Funding for Lending scheme, almost half of firms (49.8%) believe that credit is unaffordable up from the 48% reporting the same in Q1 2014. There is also a further sign this quarter that credit remains unavailable to the majority of small firms. This quarter, 60.9% of small firms report finding credit availability as poor or very poor, up from 58.5% in Q1 2014. These latest findings corroborate the Bank of England s Q1 Credit Conditions Survey report, which showed no improvement in the availability of credit to small corporates compared to the previous three months. -20-25 -30-35 -40-45 Figure 8: Indices of credit affordability / availability perceptions over time, a weighted net balance of those with negative responses subtracted from those with positive responses -50-55 -60 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Credit availability index Credit affordability index Source: FSB-RbD Voice of Small Business Panel Survey 17
FSB Voice of Small Business Index 2014 Revenue and profitability This quarter, a net balance of 18.1% of small businesses report turnover has risen during the past three months. 18
www.fsb.org.uk Revenues have now seen positive growth for a full year This quarter, a net balance of 18.1% of small businesses report that turnover has risen during the past three months. This is well up on the marginal decline seen in Q2 2013 and now represents a full year in which small firms have seen revenues rise on average each quarter. In addition, a positive net balance of small firms this quarter are reporting an increase in gross profits over the past three months for only the second time since the series began in 2012. This compares to zero profit growth reported on average in Q1 2014. Looking forward, companies expect their financial performance to strengthen further in line with their expectations of an improving business environment, as a net balance of 29.6% expect turnovers to rise over the coming three months. This rising revenue is expected to support profit growth, with a net balance of 18.7% expecting gross profits to increase over the next three months. 40% 30% 20% 10% 0% Figure 9: Small business revenue growth and gross profit, net percentage balance share reporting increase less share reporting decrease -10% -20% -30% Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Revenue, previous three months Gross profit, previous three months Revenue, coming three months Gross profit, coming three months Source: FSB-RbD Voice of Small Business Panel Survey 19
FSB Voice of Small Business Index 2014 Exports A net balance of 20.7% projection increase in overseas sales in three months ahead. 20
www.fsb.org.uk Small firms optimistic on export growth Export conditions for small UK firms have been broadly stable in recent quarters, with a net balance of 7.3% experiencing export growth over the past three months. This share is largely unchanged from that seen recently, although stands above that seen in early 2013. However, businesses expect their export performance to improve over the three months ahead, with a net balance of 20.7% projecting an increase in overseas sales. These expectations are encouraging for overall UK growth prospects, as trade will be a crucial element of growth in the long term. The IMF expects the eurozone to grow over 2014 as a whole for the first time since 2011, a factor that will help to bolster UK export demand. The March 2014 budget announced an expansion of the Direct Lending export finance scheme, doubling the size of the pot to 3 billion and reducing the rates to the lowest possible by international law. The scheme helps prospective buyers of UK capital goods or services to finance their purchases. However, the latest results from the SBI suggest that the Government could do more to get small companies to access the help provided for exporting. This quarter, just one in five small firms (20.6%) report that they have found it easy to access government support, while 35.2% believe it is difficult and 44.1% are unsure. In addition, the challenge to exporting for most (30.4%) small exporting businesses comes from difficulty in finding overseas customers to sell to, with exchange rate fluctuations and red tape being the next largest barriers to export trading. 25% 20% 15% 10% Figure 10: Changes in exports previous three months and expectations for coming three months; net percentage balance, share reporting increase less share reporting decrease 5% 0% -5% Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Exports, previous three months Exports, coming three months Source: FSB-RbD Voice of Small Business Panel Survey 21
FSB Voice of Small Business Index 2014 Figure 11: Challenges to overcome when exporting 35% 30% 25% 20% 15% 10% 5% 0% Difficulty finding customers Fluctuating exchange rate Red tape / bureaucracy Difficulties around getting paid Difficulty finding distributors Language/ cultural barriers Concerns over protecting I.P. Tax compliance Lack of exporting support Tailoring to specific markets Legal uncertainty Lack of export finance Hard to get product to market UK Bribery Act compliance Source: FSB-RbD Voice of Small Business Panel Survey 22
www.fsb.org.uk Costs and inflation 42.6% of firms this quarter cite labour as a cause of inflation. 23
FSB Voice of Small Business Index 2014 Inflationary pressures continue to fall back This quarter, fewer businesses are reporting an annual increase in their cost of operations. A net balance of 54.2% of firms has seen cost inflation over the past year, compared to 66.2% in the year to Q2 2013. These latest results follow figures from the ONS that show input prices for manufacturers falling back sharply year on year in April 2014. In addition, year-on-year growth in both factory gate prices and the cost of services provided to business and government also slowed in the most recent data. This easing of inflationary pressures could continue throughout 2014, as the cost of hard commodities falls back. One risk to the short term outlook comes from recent movements in the price of Brent crude oil, which climbed notably in June as conflict persists in Iraq, a major oil producer. However, looking over a longer horizon, the IMF expects the global cost of oil (an average of Brent Crude, West Texas Intermediate and Dubai Fateh) to fall back by 2019, as world supply increases. 80% 75% Figure 12: Small businesses reporting increase in overall cost of operation; net percentage balance 70% 65% 60% 55% 50% 45% 40% Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Source: FSB-RbD Voice of Small Business Panel Survey 24
www.fsb.org.uk Cost pressures generally falling back, but labour costs rising The pressure being put on business operating costs by factors affected by global trends has been decreasing; fewer firms are reporting utilities, fuel or raw materials as a main cause for rising costs. In fact, the share of businesses reporting fuel as a main cause of cost increase has fallen back sharply, from more than half (51.2%) in Q2 2013 to just 29.5% this quarter. This comes as the latest ONS consumer price inflation data show vehicle fuel prices falling back year on year by 2.5% in May 2014. A few other factors have also been falling back. This quarter, just 3.3% of small firms report the exchange rate as a source of cost rises, down from 9.1% at the same point a year ago. This comes as the value of sterling has been appreciating against both the US dollar and the euro in 2014, compared to the year-on-year depreciation seen in Q2 2013. Likewise, taxation is reported as a source of cost inflation for fewer firms this quarter 11.9% compared to 14.4% in Q2 2013. This comes alongside the introduction in April 2014 of the Employers Allowance, which reduces employer NICs by up to 2,000, effectively meaning that many small firms will pay no NICs at all. However, one factor that is being cited as a cause of inflation by more firms is labour cited by 42.6% of firms this quarter, compared to just 31.3% at the same point a year ago. The UK labour market is tightening and as such, hiring costs are rising, as skills become scarce, staff change jobs more often, and higher salary increases are given. Average wages growth is likely to continue alongside an improving labour market and an improving economic outlook. The OBR forecasts average gross earnings to rise by 2.5% in 2014, up from 1.5% growth in 2013, with faster growth forecast for 2015 and the subsequent years. 60% 50% 40% 30% 20% Figure 13: Main causes for rising business costs (firms may give multiple answers) 10% 0% Utilities Labour Raw materials Fuel Rent Regulation Financing Taxation Other Exchange rate Q2 2013 Q2 2014 Source: FSB-RbD Voice of Small Business Panel Survey 25
FSB Voice of Small Business Index 2014 Capacity One in 10 (10.8%) small firms are running above capacity, while 58.5% report having capacity to spare. 26
www.fsb.org.uk Spare capacity expected to fall back in next three months This quarter, the net share of businesses running below capacity remained stable, at 47.7%, broadly unchanged from the previous three quarters. Within the headline figure, roughly one in 10 (10.8%) small firms are running above capacity, while 58.5% report having capacity to spare. However, in line with the expected upturn in revenue and improving business conditions, fewer firms expect to be running with spare capacity over the next three months, at a net balance of just 37.6%. If these expectations are realised, this would be the smallest share since comparable data began in early 2010. This is an important finding from the latest SBI, as spare capacity in the UK economy is a key factor taken into consideration by the Bank of England s Monetary Policy Committee in deciding when to raise the base rate. A sustained uptick in productivity will be needed before rates are increased, but this latest expected decline in the amount of slack in the UK economy is an encouraging sign of recovery. Financial markets have currently priced in a rate rise for late 2014 to early 2015. 70% 60% 50% Figure 14: Net percentage balance of businesses running below capacity share below capacity less share above capacity 40% 30% 20% 10% 0% Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Spare capacity, past three months Expected spare capacity, next three months Source: FSB-RbD Voice of Small Business Panel Survey 27
FSB Voice of Small Business Index 2014 Employment A net balance of 10.5% of firms expect to increase headcounts over the next quarter. 28
www.fsb.org.uk More small firms expecting to increase headcounts Steady growth in employment levels among small businesses continued this quarter, as a net balance of 2% of firms report increasing headcounts over the past three months. This private sector job creation has helped to bring down the UK unemployment rate to 6.6% in the since late 2008, the lowest that the rate has stood since late 2008. A positive balance of small firms has now been reporting employment gains for a full year, reflecting the entrenched nature of labour market recovery. Further improvements to the labour market are likely to be provided by the small business sector over the coming three months, as a net balance of 10.5% of firms expect to increase headcounts over the next quarter. If realised, these jobs created by small firms will help to offset the declines in public sector employment projected by the OBR of roughly 700,000 over the next five years. In addition, it is looking increasingly likely that the OBR s projection of a 6.8% unemployment rate for 2014 as a whole is too pessimistic, with rapid employment growth bringing down the joblessness rate at a faster pace than previously thought. 15% 10% 5% Figure 15: Net percentage balance change in number of people employed share reporting increase less share reporting decrease 0% -5% -10% Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Employment change, last three months Expected employment change, next three months Source: FSB-RbD Voice of Small Business Panel Survey 29
FSB Voice of Small Business Index 2014 Growth aspirations and challenges Nearly six in 10 (58.9%) small firms aim to grow rapidly or moderately over the next 12 months. 30
www.fsb.org.uk Aspirations cool, though still more buoyant than a year ago Despite expectations of an improving business environment and turnover growth in the three months ahead, small firms have tempered their aspirations this quarter. Nearly six in 10 (58.9%) small firms aim to grow rapidly or moderately over the next 12 months, down from 62.2% in Q1 2014. At the same time, 8.8% of small business owners expect to downsize, close or hand on their company in the next 12 months, up from 7.7% the previous quarter. Despite this slight cooling in ambition, more firms are aspiring to grow over the coming 12 months than were reporting the same in Q2 2013, suggesting that the economy is still much stronger than a year before. In addition, the strong ambitions seen in recent quarters follow a long period of weakness in business conditions - this latest movement may indicate an expected return to more stable conditions, following the current bounce back environment. 64% 62% 13% 12% Figure 16: Growth aspirations for next 12 months 60% 11% 58% 10% 56% 9% 54% 8% 52% 7% 50% 6% Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Grow rapidly / moderately (LHS) Downsize, close or hand on (RHS) Source: FSB-RbD Voice of Small Business Panel Survey 31
FSB Voice of Small Business Index 2014 Skills shortages becoming more of a hindrance to growth Small businesses this quarter have been generally reporting an easing in barriers to achieving growth aspirations, the one main exception being the availability of appropriately skilled staff. This quarter, nearly three in 10 small companies (29.9%) report skills shortages as a barrier to growth, up from 25.4% in Q1 2014. Skills shortages are particularly being felt in the construction and computer services sectors, where 44% and 43% of small firms respectively are reporting this problem. At the other end of the scale, finding workers with the right skills is much less of a problem in the retail, hospitality and leisure industries generally areas that require less specific skill sets and training requirements are relatively less onerous. As the labour market continues to tighten alongside economic recovery, it is likely that skills shortages will become an increasing problem for more businesses. While this helps to boost the wage bargaining power of workers with the right skills, it also poses a risk to the momentum of economic growth. It is therefore crucial to the long term sustainability of economic expansion that training for the right types of skills is provided, and for the stock of human capital is increased a longstanding area of weakness for the UK economy. At the other end of the scale, fewer businesses are reporting domestic economic conditions as a constraint on achieving growth aspirations. Consumer demand remains strong, as more households return to employment, and rising consumer confidence is supporting spending decisions. In addition, in line with fewer firms reporting that fuel, utility and input costs are a source of business cost inflation, these factors are also less of a barrier to achieving growth aspirations for many firms. Figure 17: Possible barriers to achieving growth aspirations multiple answers possible 60% 50% 40% 30% 20% 10% 0% Domestic economy Consumer demand Appropriately skilled staff Tax burden Labour costs Access to finance Regulation Rent/premises Fuel costs Q1 2014 Q2 2014 Utility costs Foreign economy Input costs Cost of finance Other Source: FSB-RbD Voice of Small Business Panel Survey 32
www.fsb.org.uk Investment One in four firms (25.6%) expect to increase capital investment over the next 12 months, well up from a balance of 15.8% in Q2 2013. 33
FSB Voice of Small Business Index 2014 Investment intentions remain strong Reflecting companies expectations of an improved business environment in the months ahead and aspirations that are more buoyant than a year ago, investment intentions remain strong among small firms. This quarter, a net balance of more than one in four firms (25.6%) expects to increase capital investment over the next 12 months, well up from a balance of 15.8% in Q2 2013. However, this is below the 26.6% seen last quarter, in line with the marginal cooling of small firms growth aspirations. Despite the small dip this quarter, the continued strength of small businesses investment intentions is positive news for UK growth prospects. Business investment helps to boost productivity, which in turn feeds through into higher wages and living standards. In addition, buoyant investment intentions are a good indicator of the confidence of small businesses in economic prospects beyond the next three months. Spare capacity is expected to fall back, yet firms are willing to invest to take advantage of expected future increases in demand. 30% Figure 18: Net percentage balance in anticipated capital investment growth over next 12 months share reporting increase less share reporting decrease 25% 20% 15% 10% 5% 0% Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Source: FSB-RbD Voice of Small Business Panel Survey 34
www.fsb.org.uk Method This report is based on the May 2014 FSB Voice of Small Business Panel survey of FSB members carried out by Research by Design. All panel members (7,978) were invited to take part in an online survey. Reminders were sent to all non-respondents. 2,458 responses were received, a response rate of 31%. The data is weighted by regional gross value added to match the profile of small businesses across the UK and this accounts for the slight variation in results from the FSB Voice of Small Business panel surveys. The survey was undertaken between the 8 th and 20 th May 2014. The FSB is the UK s leading business organisation. It exists to protect and promote the interests of the self-employed and all those who run their own business. The FSB in non-party political, and with around 200,000 members, it is also the largest organisation representing small businesses in the UK. The data presented in this FSB report written by the CEBR in Q2 2014 is weighted differently to the FSB reports and therefore the results may differ. For more information please contact priyen.patel@fsb.org.uk 35
FSB Voice of Small Business Index 2014 Summary data table Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Small Business Index 1.3 4.5 5.6 6.3 +15.9 +33.5 +21.6 +35.7 +39.7 Employment - previous three months Employment - coming three months -3.9% -3.7% -1.5% -4.2% -1.4% 3.7% 1% 2.1% 2% 0.8% -0.4% 0% 0.8% +4.8% 5.8% 3.1% 7.6% 10.5% Revenue - previous three months -2.2% -6.5% -3.5% -7.2% -0.4% 12.8% 18.8% 13.1% 18.1% Revenue - coming three months 2.8% -4.4% -3.4% 5.7% 11.3% 20.1% 16.2% 26.5% 29.6% Investment intentions coming 12 months Credit availability rated good or very good Credit availability rated poor or very poor Credit affordability rated good or very good Credit affordability rated poor or very poor 14.3% 9.9% 15.1% 13% 15.8% 21.1% 23.2% 26.6% 25.6% 7.7% 6.9% 8% 9% 9.7% 12.4% 12.7% 13.5% 12.5% 72.8% 74.7% 68.2% 71.1% 67.5% 65.9% 58.3% 58.5% 60.9% 12% 10.9% 14.4% 13.8% 14.1% 19% 18.1% 19.2% 18% 61.5% 61.9% 58.5% 59.7% 54.8% 55% 50.7% 49.8% 51.1% The SBI weights strong responses (much improved or much deteriorated conditions) double and subtracts the weighted proportion of firms reporting deterioration in business prospects over the coming three months from the weighted proportion expecting an improvement. The Employment and Revenue indicators are net percentage balances, with the proportion of firms reporting a decrease subtracted from the proportion reporting an increase. Responses are also weighted according to regional gross value added. 36
Federation of Small Businesses www.fsb.org.uk F t federationofsmallbusinesses @fsb_hq If you require this document in an alternative format please email; accessability@fsb.org.uk All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission of the FSB. While every effort has been made to ensure the accuracy of the facts and data contained in this publication, no responsibility can be accepted by the FSB for errors or omissions or their consequences. Articles that appear in the report are written in general terms only. They are not intended to be a comprehensive statement of the issues raised and should not be relied upon for any specific purposes. Readers should seek appropriate professional advice regarding the application to their specific circumstances of the issues raised in any article. This report can be downloaded from the FSB website at http://www.fsb.org.uk/documents