FSB Voice of Small Business Index Quarter 1, 2015
FSB Voice of Small Business Index 2015 Contents Q1 snapshot 3 FSB National Chairman 4 Economist s view 5 Executive summary 6 UK macroeconomic overview 7 Small Business Index 8 Regional Small Business Indices 9 Sector Small Business Indices 11 Revenue and profitability 14 Exports 16 Costs and inflation 18 Capacity 21 Employment 23 Productivity 26 Growth aspirations and challenges 28 Credit 31 Investment 35 Method.......................... 37 2
www.fsb.org.uk Voice of Small Business INDEX Q1, 2015 PAY INCREASE Small businesses expect to increase pay at a faster rate Average salary increase anticipated of 1.8% in the next 12 months JOBS Net balance of 4.2% FINANCE of Small firms have taken on new staff, up from a balance of 2.1 per cent a year ago Businesses who have applied and been approved for a loan from their bank is up to 57% compared to 45.3% 12 months ago PROFITS Revenues and profits are rising. A balance of 19.5% report revenues grew over the past three months and a balance of 12.5% for gross profits reported the same SKILLS 37% of firms tell us a lack of skills are a barrier to growth compared to 25.4% 12 months ago LACK OF SKILLS 3
FSB Voice of Small Business Index 2015 FSB Voice of Small Business Index John Allan, FSB National Chairman The latest FSB Small Business Index (SBI), confirms that FSB members remain clearly confident and on firm ground with a showing of +28.7. Indeed, 61.1% of firms have aspirations to grow in the next 12 months. This high level of optimism across the small business sector is good news for continued economic recovery, and productivity growth has been both substantial and stable over the past three quarters. As we enter an election year things are looking good for small businesses and we will be looking to the next government to continue supporting small businesses and build on the strengthening economic foundations of the UK labour market. Employment is a key indicator of the health of the economy and small businesses took on more staff over the past three months than the same time last year. Small businesses already employ close to half the UK workforce and the strong hiring intentions of our members could see the importance of small firms to the labour market increase further. The welcome rise in employment brings the longstanding issue of finding appropriately skilled staff to the foreground, with significant numbers of firms reporting this as a barrier to achieving growth aspirations. Further tightening of the labour market is likely to prolong the skills shortage, putting small businesses under pressure to increase wages out of alignment with profitability. Concerted measures need to be taken by government, the education sector and the business community to ensure the UK has the skilled workforce it needs to compete with other countries. While around one third of firms find consumer spending to be a barrier to growth, the accommodation and food sectors have experienced gains from consumers having more disposable income as their wages stretch further, due to low prices. Also, the risk of inflation appears to be reduced with the majority of businesses reporting spare capacity and modest wage rises. This bodes well for the rest of 2015. There is also good news in the form of lower costs of doing business. Manufacturing and construction are among the most optimistic sectors and both of these will have felt the benefit of low fuel, inputs, and energy costs. There is more good news for businesses looking to grow with fewer firms finding access to finance to be a barrier to growth. The highest number of firms todate have reported that loans and overdrafts are more available. Alongside this, credit has also become more affordable. Combined together, these make investing in their businesses easier for firms. However, whilst the finance market is evolving with new products and new entrants, there is still a funding gap and the FSB supports the role of the British Business Bank in addressing this. More needs to be done to give sole traders and microbusinesses the right business support, in particular around their applications for credit, so they can get the finance they need to develop and grow. The stability in the export market highlights the tenacity and entrepreneurship of small businesses in the face of uncertainty in the Eurozone. The number of businesses who choose to export has remained stable and many businesses are confident they will get a higher value of exports in 2015. However, there is significant scope to extend the role of UK exporters in the global market. This will take time and the work of the UKTI must continue to be supported and built upon to encourage and support exporters. The 2015 general election will bring opportunities for whatever parties that make up the new government to address these issues, as set out in our business manifesto. The next government should endeavour to deliver sustained economic recovery, rebalance the economy drive sustainable growth in every nation and region, create high-quality jobs and full employment, make markets work better, and lower the costs of doing business. 4
www.fsb.org.uk Economist s View This first FSB Small Business Index report of 2015 highlights how the year ahead is likely to be one of stability. The headline confidence index stands below its reading a year ago, suggesting that fewer small businesses expect conditions to improve further in the quarter ahead. However, given how far the trading environment has strengthened in the past two years or so, it is likely that this downward trend reflects businesses seeing a return to steady growth conditions, rather than signalling the start of a downturn. This picture of stability can also be seen in the financial performance reported by the UK s small businesses. The share of those experiencing turnover growth has remained broadly unchanged, and well into positive territory, for the past year. More firms are seeing profit increases, which are likely explained in part by the welcome trend of lower energy and fuel costs, reducing the pressure on bottom lines around the economy. Small firms also appear relatively optimistic on the longer term outlook for the economy, with more than two thirds of businesses expecting to increase capital investment spending in the year ahead. This share has remained broadly stable since the start of, and represents a big uptick from previous years. Small companies are already providing a steady contribution to employment gains, with notable increases in headcounts for the past three quarters. This hiring is helping to reduce slack in the UK labour market, bringing the unemployment rate near to pre financial crisis levels. With a tighter labour market, pay growth has picked up 1.5% over the past year, and with expectations of 1.8% growth over the next 12 months. In conjunction with an inflation rate that is expected to dip into negative territory in 2015, workers will see significant gains to their real incomes, helping to further support domestic demand. There are many bright spots in the outlook for the UK s small businesses, but there are also a few challenges emerging. The first is that export prospects remain under pressure. This quarter, the share of businesses reporting export growth fell back to low levels, alongside continued weak economic expansion in the Eurozone and a slowdown in some of the world s larger emerging markets. Although firms are optimistic about export growth in the three months ahead, there is significant downside risk for the single currency area, as the threat of a Greek exit from the Eurozone rumbles on. Another key concern is the extent to which a lack of skilled workers will hold back growth over the medium term. The availability of skilled staff is a key barrier to small businesses, as noted in this quarter s report, and this trend is likely to worsen as the unemployment rate falls further. Without reforms addressing the mismatch of skills in the economy, the UK s growth will be limited by this fundamental constraint. Lastly, there remains little sign of a rebalancing of growth around the UK s regions. This quarter, the south of England occupies the top of the confidence rankings, with the devolved regions and the north of England the bottom end. Government spending cuts over the next parliament could affect these parts of the UK, a trend that may further weigh on business confidence in these regions in the coming years. Rob Harbron, Senior Economist, Cebr 5
FSB Voice of Small Business Index 2015 Executive summary Key findings this quarter: The headline Small Business Index shows a year-on-year fall, at +28.7 compared to +35.7 last year. This represents confidence levels still firmly in positive territory, but slightly cooler than a year ago as stability starts to become the order of the day. Confidence is highest in the Eastern, South East and London regions of the UK. London and the North East bucked the national trend of falling confidence. The index experienced large drops in the West Midlands, which had been at the apex of the regional table, and Yorkshire. Construction and manufacturing lead the sector table for confidence. As the property market moves into reverse following a long growth period, real estate sees a substantial year-on-year fall pushing it into negative territory and the bottom of the table. A significant proportion of firms continue to report rising profits and turnovers. Businesses also expect these key financial performance indicators to strengthen over the three months ahead. Export growth remains in positive territory, with more firms expecting growth in the three months ahead. However, the share that are reporting increases in exports has fallen back this quarter. Small businesses are beginning to feel the effect of the deflationary trend in many key input markets. The lowest-ever proportion of businesses (44.4%) currently report a yearon year increase in costs, compared to +60.3% during Q1. Fewer small businesses are reporting fuel, inputs and utilities as contributors to rising costs. On the other hand, more are citing labour costs as a driver of increases in total costs. Firms aspirations remain highly optimistic. While 61.1% expect to grow over the next twelve months, similar to last year s result of 62.3%, only 8.9% are planning to shrink or hand on their businesses. Productivity has risen substantially for three quarters in a row, according to the FSB Productivity Index. This increased by 1.3% year-on-year during Q1 2015, which is encouraging news for wages. Higher wages will ultimately benefit small businesses as they ensure sustainable growth in consumption, expanding their markets. Despite recent economic growth, small businesses are concerned about the state of the economy and consumer demand over the year ahead. The tentative trend of rising wages in real terms may go some way to alleviating the deficiency of demand that evidently still affects firms. Small businesses plan to maintain a robust level of investment over the next 12 months. A majority of firms intend to increase capital investment compared to the current level, with a net balance of +24.9% of firms responding this way. The trend appears to be stabilising at around this level. 6
www.fsb.org.uk UK macroeconomic overview Falling prices more likely to aid than harm British economy Large price falls for commodities, principally energy, have dominated the global economic outlook. The cost of Brent crude oil fell to below $50/barrel in January and has remained below $60 thereafter, compared to over $100 for most of the period since 2011. While estimates vary, economists predict that the price will remain around $50 in the near term. The implications have already been significant: inflation fell outside its target range to 0.3% during January. The Bank of England underlined this in its latest inflation report (for February), which predicts a brief period of deflation in 2015. Most anticipate that the period of deflation will be brief in the UK. This means it should not fall into the dreaded deflationary spiral (threatened in Europe, owing to weak demand), where consumers put off purchases in order to wait for price falls, businesses defer investment, and debts rise in real terms. By contrast, the impact is expected to be largely benign thanks to the extra discretionary income which consumers will have now that their essential goods and services are reduced in price. This comes at a period when wages are showing tentative signs of recovery. Pay across the economy grew by 1.7% year-on-year according to the latest (December) figures, which the low rate of inflation converts into a sizable gain in purchasing power. It is also beginning to show sustained improvement, something the recovery has so far lacked. The tightening in the labour market unemployment was down to 5.7% by December compared to its 2011 peak of 8.5% will lead to a continuation of this trend, as workers now have stronger bargaining power. These 6% 5% 4% patterns are all evident in the latest SBI survey: businesses report paying their workers more, hiring more workers, and the FSB Productivity Index finds gains in output per worker at small businesses. The GDP growth rate has cooled slightly, according to the latest official data. The latest (Q4) figure was 0.5% quarter-on-quarter, compared to 0.7% during Q3. A slight reduction in the rate was expected given that the UK economy had just undergone a period of recovery, during which a run of above-trend growth is usual. The latest Small Business Index reported at the time that firms were beginning to experience this cooling effect. The slowing of growth is accompanied by a moderation in the property market, which had been overheating. While rising house prices had provided a useful boost to consumer confidence during the period of low wage growth, this support to optimism is now likely to be provided by wages increasing in real terms. The domestic market, then, is in a robust condition. However, the great uncertainty over the future of the UK s main export market represents a potential danger to the recovery. A Greek exit from the currency union is again a fear, a possibility which would likely lead to further stagnation in the Eurozone. Domestically, the risk of an indecisive general election in May and consequent political uncertainty also worries businesses. Risks abound over the near future, but as it stands the UK economy has a number of encouraging features, many of which are highlighted by this survey of small businesses. Figure 1: UK inflationary environment easing as global commodity prices fall back 3% 2% 1% 0% Dec 2006 Mar 2007 Jun 2007 Sep 2007 Dec 2007 Mar 2008 Jun 2008 Sep 2008 Dec 2008 Mar 2009 Jun 2009 Sep 2009 Dec 2009 Mar 2010 Jun 2010 Sep 2010 Dec 2010 Mar 2011 Source: YouGov/Cebr Consumer Confidence report November Jun 2011 Sep 2011 7 Dec 2011 Mar 2012 Jun 2012 Sep 2012 Dec 2012 Mar Jun Dec Mar Jun Sep Dec
FSB Voice of Small Business Index 2015 Small Business Index Year-on-year drop in confidence represents moderation, rather than pointing to trouble The Small Business Index stands at +28.7 at the beginning of 2015. This represents an improvement on last quarter s result of +17.6; however, the seasonal variation in the index means that the year-on-year change is a more relevant gauge of performance. By this measure, sentiment has cooled somewhat it stands seven points below the reading during Q1. This should not be seen as a cause for concern, as it is still comfortably positive. Rather, it reflects the stage of the economic cycle the UK is currently in. Having accelerated throughout late and early, it is now cooling and business sentiment is reflecting this. However, while optimism is slightly lower than recent readings, 81% of firms still believe conditions will stay the same or improve. This bodes well for the next three months. The current environment is broadly advantageous to many firms in the sense that demand is relatively robust, but input prices are very low and wages are still not rising rapidly in most sectors. 50 40 30 20 18.0 15.9 10 6.7 6.3 2.8 0.3 2.2 1.3 0-3.6-10 -20-30 -9.1-13.2-24.5-4.5-5.6 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 Q2 Source: FSB-Verve Voice of Small Business Survey Q3 33.5 Figure 2: The FSB SBI 1 : small business prospects over coming three months 50 40 30 20 10 0-10 -20-2.5-5.5-11.3-11.3 38.0 27.2 29.4 23.7 18.8 14.6 7.5 4.6 1.0 4.1-4.6-4.0-7.0 Figure 3: Year-on-year change in the FSB SBI Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2015 Q4 21.6 Q1 35.7 Q2 39.7 Q3 41.0 17.6 Q4 28.7 Q1 2015 Source: FSB-Verve Voice of Small Business Survey 1 The Small Business Index 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 Small Business Index is derived from the sum of these factors. 8
www.fsb.org.uk Regional Small Business Indices London, South East and Eastern regions exhibit most confidence. 9
FSB Voice of Small Business Index 2015 South East England returns to top of regional tables The latest regional breakdown in confidence shows confidence falling year-on-year for all regions bar London and the North East. This mainly reflects the same drivers as the general trend identified above. However, worth noting is the fact that London and the North East have had slightly different timings to their economic cycles compared to the rest of the country. Small businesses in London showed strong improvements in confidence during, and the capital saw a pickup in growth before other regions. Therefore London businesses were less optimistic about improvement compared to other regions during early, as a degree of improvement had already occurred. The North East, on the other hand, was at a low ebb during early as well, as the recovery has come for that region slightly later. While declines in confidence were widespread, large drops occurred in the West Midlands and Yorkshire and the Humber. Small businesses in the Eastern, South East and London regions currently have the strongest sentiment in the UK. Figure 4: FSB SBI regional variation in small business prospects over coming three months 60% 50% 40% 30% 20% 10% 0% Eastern South East London England South West E. Midlands North West Scotland North East Wales W. Midlands Yorkshire N. Ireland Q1 Q1 2015 Source: FSB-Verve Voice of Small Business Survey 10
www.fsb.org.uk Sector Small Business Indices Construction and manufacturing are the most confident sectors. 11
FSB Voice of Small Business Index 2015 Manufacturing still placed among most optimistic sectors Construction and manufacturing stand at the top of the sectoral confidence tables, while real estate has taken a substantial fall such that it is now placed at the very bottom of the ranking. Manufacturing has ranked consistently near the top of the sectoral index for the past year. Targeted government support and a drive to export to parts of the world which the UK has traditionally weak trade links with, enabled manufacturing to stand consistently among the most optimistic parts of the economy. In common with other sectors, it has lost a little confidence over the past year. While part of this relates to the deterioration in the global outlook manufacturing being an internationally integrated sector part is simply the general moderation in UK companies prospects now that the economy is on firmer footing. A strengthening pound may also be concerning manufacturers. Real estate sectoral confidence has fallen back substantially, having been among the most optimistic sectors a year ago. The property market contributed to the recovery, as increasing house prices provided a boost to some consumers before wages started to rise. However, the acceleration in house prices also cooled before the overall economy did so. Some property market indicators are now starting to show declines in prices and activity. As a result some high-profile companies in the sector have started to post profit warnings. It is therefore to be expected that smaller firms in the same sector are finding market conditions tougher. On the other hand, construction firms are not under the same pressure. Construction output remains strong after years of pent-up demand. Additionally, the fall in energy costs is of great relevance for construction, though not real estate. The stagnation of wages took its toll on the accommodation and food sector, which thrives when households disposable income is rising. A year ago it was among the least optimistic sectors, whereas having posted significant gains it is now in the middle of the ranking and fairly optimistic, with a net balance of +30% of firms expecting improvement over the coming three months. Two trends are helping the sector on the disposable income front; inflation (0.5% year-on-year on the latest reading) is still falling rapidly, and the trend shows no sign of stopping. It is led by cheaper fuel and food prices. This means even with stagnant wages, consumers disposable incomes rise as essentials take less out of their budgets. Annual wage growth, while still modest, has now started to show a distinct upward trend, approaching 2% during November. The outlook for the food and accommodation sectors is looking more positive as real wages start to rise. 12
www.fsb.org.uk Sector Score Q1 2015 Q1 Real estate activities Arts, entertainment and recreation -13-8 22 48 Figure 5: FSB SBI by sector small business prospects over coming three months Administrative and support activities 1 Information and communication Education 13 20 45 Wholesale and retail trade; repair of motor vehicles 20 25 Transportation and storage 50 43 Accommodation and food service activities Professional, scientific and technical activities 30 34 20 Human health and social work activities 39 27 Financial and insurance activities Other 42 43 45 46 Manufacturing 44 54 Construction 51-20 -10 0 10 20 30 40 50 60 45 Source: FSB-Verve Voice of Small Business Survey 13
FSB Voice of Small Business Index 2015 Revenue and profitability 28.5% of business expect turnover growth in the next three months. 14
www.fsb.org.uk Robust turnover and profit growth continues A net balance of +19.5% of firms reported that their revenues grew over the last three months. A balance of +12.5% reported the same for gross profits. These figures are similar to those reported in recent quarters, reflecting generally stable growth conditions prevailing for small businesses. In addition, firms are expecting the next three months to deliver higher totals on both counts, with the balance expecting higher revenues during Q2 2015 standing at +28.5%, while those expecting higher profits is +19.1%. What happens to input costs will determine whether growth in revenues does indeed create growth in profits. While the price of oil on international markets may have stopped falling, its effects on energy costs for businesses will pass through for some time to come. This applies to many other inputs, while wage growth remains relatively mild. This means that increases in revenues are likely to outstrip increases in costs, with consequent upward momentum for firms profits. 40% 30% 20% 10% Figure 6: Small business revenue growth and gross profit, net percentage balance share reporting increase less share reporting decrease 0% -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 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2015 Q2 2015 Revenue, previous three months Gross profit, previous three months Revenue, coming three months Gross profit, coming three months Source: FSB-Verve Voice of Small Business Survey 15
FSB Voice of Small Business Index 2015 Exports 23.9% of small firms exported goods or services on Q4. 16
www.fsb.org.uk Small business exports still improving on balance The share of businesses exporting products overseas is currently 23.9%, broadly in line with the 23.7% of firms that exported in Q1. This trend is likely to continue, as 42.3% of small firms report being unlikely to begin exporting, versus just 5.9% who are considering the prospect. Among those small businesses who are exporting, the balance of firms seeing growth has fallen back to 3.1%, down from 9.2% reporting the same in Q1. This comes as global growth conditions have slowed and economic expansion in the Eurozone remains relatively weak. However, regarding the next three months, a balance of +16.5% of firms are optimistic for export growth. The evolving situation in the Eurozone will be crucial: the European Central Bank s quantitative easing scheme announced in January has improved market sentiment, but Greece s recent election raised new fears for the near future. On balance, current data such as the Eurozone s recent stronger-than-expected GDP figures suggests that demand should improve on the continent. 18% 16% 14% 12% 10% 8% 6% 4% Figure 7: Changes in exports previous three months and expectations for coming three months; net percentage balance, share reporting increase less share reporting decrease 2% 0% -2% Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 Q2 Q3 Q4 Export growth, previous three months Q1 Q2 Q3 Q4 Q1 2015 Q2 2015 Expected export growth, coming three months Source: FSB-Verve Voice of Small Business Survey 17
FSB Voice of Small Business Index 2015 Costs and inflation Fewer small firms report increasing costs this quarter. 18
www.fsb.org.uk Marked decline in cost pressures on small businesses The net balance of small businesses reporting increased costs this quarter has fallen significantly compared to last quarter and even more substantially compared to Q1 2015. At +44.4%, it is the lowest balance so far reporting an increase in costs. This in part reflects the sharp declines in the cost of crude oil on the world markets starting to feed through into business costs. As energy supply contracts at small businesses continue to come up for renewal, downward pressure is likely to continue on operating costs. Figure 9 shows costs of utilities, fuel and other inputs have seen the greatest falls when compared with one year ago, conforming to recent macroeconomic trends. On the other hand, small businesses are feeling the effect of rising wages as the labour market tightens. Workers bargaining power grows as the pool of unemployed workers shrinks. Labour has risen to the most-reported source of cost pressures for firms, from a position of fourth one year ago. Since labour is most firms most significant input, this means that costs overall are still rising for a majority of firms. The other cost driver displaying substantial movement is financing. While not a key concern for many firms it is one of the least cited factors it remains encouraging that affordability of credit is improving. 80% 75% 70% Figure 8: Small businesses reporting an increase in overall cost of operation; net percentage balance 65% 60% 55% 50% 45% 40% 35% 30% Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2015 Source: FSB-Verve Voice of Small Business Survey 19
FSB Voice of Small Business Index 2015 60% 50% 40% 30% 20% Figure 9: Main causes for changing business costs (firms may give multiple answers) 10% 0% Labour Utilities Inputs Rent Regulation Fuel Other Taxation Financing Exchange rate Q1 Q1 2015 Source: FSB-Verve Voice of Small Business Survey 20
www.fsb.org.uk Capacity A net balance of 41% of firms expect to run below capacity over the next quarter. 21
FSB Voice of Small Business Index 2015 Businesses expect further spare capacity reductions ahead This quarter, a net balance of 51.71% of firms report operating with spare capacity. Although this figure is notably up from the previous quarter, this likely represents seasonal trends with Q1 typically being a quarter where there is more slack among small businesses. These latest results are broadly unchanged from a year ago, suggesting there is still some scope for rising demand to be accommodated. In addition, the balance of firms expecting spare capacity during the three months ahead falls to just 41.1%, which if realised would be the lowest figure since the series began. However, while this downward trend may continue during 2015, other trends suggest total spare capacity in the economy will begin to stabilise. For instance, the employment rate, which measures the proportion of those of working age who are currently in employment, was last recorded (in December ) at around 73.2%. This is a rate which it has only surpassed twice since 1970, both times for brief intervals. Once pre-crisis levels of slack are reached once again, it is likely that more inflationary domestic pressures will start to emerge, particularly faster wage growth. Figure 10: Net percentage balance of businesses running below capacity share below capacity less share above capacity 70% 60% 50% 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 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2015 Q2 2015 Spare capacity, past three months Expected spare capacity, next three months Source: FSB-Verve Voice of Small Business Survey 22
www.fsb.org.uk Employment A net balance of 4.2% of small business hired new staff in Q4, double the rate of Q4. 23
FSB Voice of Small Business Index 2015 Small businesses continue to take on employees The net balance of small businesses reporting that they increased the size of their workforce over the last three months has stayed broadly stable, at +4.2% compared to +4.4% during Q4. However, this is double the net balance recorded during the same period a year ago, highlighting a notable strengthening of hiring conditions. Furthermore, a significant balance (+10%) of small businesses expect to increase their headcount over the next three months. This is encouraging, with continued small business employment creation likely to help offset planned job cuts in the public sector. The latest (Q3 ) data show these cuts have totalled around 300,000 during the last year, with the Office for Budget Responsibility forecasting more reductions over the rest of the decade. Figure 11: Net percentage balance change in number of people employed share reporting increase less share reporting decrease 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -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 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2015 Q2 2015 Employment change, last three months Expected employment change, next three months Source: FSB-Verve Voice of Small Business Survey 24
www.fsb.org.uk Accommodation and food services firms awarding largest pay rises The average wage rise reported by small businesses is currently 1.5% compared to a year ago. The sectors driving this increase were manufacturing and accommodation and food services. This is in line with the relatively high confidence regarding the future reported in those sectors. The situation in manufacturing also reflects the relative shortage or surplus of skills in these sectors: of small manufacturers, a relatively high proportion (14.8%), reported labour costs were a potential barrier to growth, while 29.1% responded that appropriately skilled staff could act as one. The other sectors awarding significant increases in pay are business services and education. On the other hand, while anecdotes of large pay rises in the construction sector are common, the reality reported by small businesses is that employees received an average rise of just 1.4%. A difficult environment for the real estate sector is likely responsible for the only pay cut across all sectors, which was 0.2% year-on-year. Over the year ahead, small businesses as a whole expect to increase pay at a faster rate, with an average salary increase of 1.8% anticipated. With consumer price inflation expected to dip into negative territory for a brief part of this year, workers will see substantial increases to their spending power in real terms, particularly compared to the five years or so of real wage declines since the financial crisis. 3.0% 2.5% Figure 12: Average salary increase awarded this quarter versus a year before 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% Accommodation & food service Manufacturing Business services Education Information & communications Wholesale & retail; automotive Construction Transportation & storage Human health & social work Financial & insurance Arts, entertainment & recreation Real estate Source: FSB-Verve Voice of Small Business Survey 25
FSB Voice of Small Business Index 2015 Productivity The FSB s productivity index reports three quarters of significant productivity rises. 26
www.fsb.org.uk Small businesses returning to sustained productivity growth The chart below shows the evolution of productivity in the UK since 2010. The FSB developed this indicator at the end of in order to track the growth of productivity among UK small businesses, the issue having become topical following a long period of low or negative growth. The indicator measures the growth of output per employee. Productivity growth is crucial to wage growth: unusually low productivity growth is one of the main factors which economists attribute to the stagnation in wages since the crisis. The chart below demonstrates that small business productivity has not yet reached its 2010 levels, but has recently started to rise again after years of decline. With annual growth of 1.3%, this quarter marks three quarters of significant productivity rises, the first time that this has happened since the series began. Output per worker now stands at 93,400 per year. This trend bodes well for wage growth over the coming months. 94.5 94k 93.5k 93k 1.5% 1.0% 0.5% Figure 13: Small business productivity and year-on-year change (inflation adjusted turnover per employee) 92.5k 92k 0.0% 91.5k -0.5% 91k 90.5k -1.0% 90k -1.5% 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 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2015 Inflation-adjusted turnover per worker (LHS) Year-on-year change (RHS) Source: FSB-Verve Voice of Small Business Survey 27
FSB Voice of Small Business Index 2015 Growth aspirations and challenges 61.1% of firms surveyed expect to grow in the next 12 months. 28
www.fsb.org.uk Aspirations slightly lower as confidence cools Firms aspirations have fallen back marginally this quarter. Compared to the same quarter a year ago, the proportion aspiring to grow is down by 1.2 percentage points, at 61.1% compared to 62.3% at the same point last year. The current figure continues to represent a relatively robust outlook, certainly with many more firms aspiring to grow than in 2012, when the series began. However, the proportion of respondents planning to downsize, sell or hand on their firms is higher than last year, at 8.9% compared to 7.7% in Q1. It is worth noting that owners planning to hand on a business may do so for personal reasons rather than economic factors, or even in response to good economic performance, such as to take advantage of recent success by selling their stake. The relatively low proportion of respondents giving this answer is encouraging from the point of view of small businesses, since a high percentage of these replies tend to correlate with weak economic performance. 64% 62% 13% 12% Figure 14: Growth aspirations for next 12 months 60% 11% 58% 10% 56% 9% 54% 8% 52% 7% 50% Q3 2012 Q4 2012 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 6% Q1 2015 Grow rapidly / moderately (LHS) Downsize, close or hand on (RHS) Source: FSB-Verve Voice of Small Business Survey 29
FSB Voice of Small Business Index 2015 Skills shortages rising on small businesses list of concerns The domestic economy and consumer demand both remain prominent in the list of firms barriers to growth, with the number of firms reporting these rising marginally compared to a year ago. The share of those concerned about the foreign economy has also risen, likely affected by uncertainty of the Eurozone, as talk of a Greek exit rumbles on. Also rapidly rising in the list of concerns is finding appropriately skilled staff, in line with the tightening in the labour market and wage rises in certain specialised industries. This trend is likely to continue as the unemployment rate continues to come down and may constrain UK growth over the medium term. In line with the sharp reductions in energy costs, very few firms are now reporting fuel or utility costs as a barrier. Lastly, fewer are reporting access to finance as a barrier to growth compared to a year ago, which aligns with the trend of improving credit availability identified later on in Section XV. Figure15: Possible barriers to achieving growth aspirations multiple answers possible 60% 50% 40% 30% 20% 10% 0% Domestic economy Consumer demand Appropriately skilled staff Regulation Tax burden Labour costs Rent/premises Access to finance Foreign economy Other Input costs Cost of finance Utility costs Fuel costs Q1 Q1 2015 Source: FSB-Verve Voice of Small Business Survey 30
www.fsb.org.uk Credit 57% of small firms that applied for credit in the past three months had their application accepted. 31
FSB Voice of Small Business Index 2015 Sharp jump in credit approval figures signal improvement in the credit environment for small businesses Figure 16: Credit applications and interest rates offered Have you applied for credit in the past three months? No 83% Yes 17% Were you successful? No 30% Yes 57% Decision pending 13% 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% Q1 Q1 Q1 2015 Source: FSB-Verve Voice of Small Business Survey More small businesses are applying for credit, encouraged by a rising success rate among applicants. A year ago, 16% of firms applied for credit and of those, just 45% were approved. In the past three months, 17% applied for credit, with a 57% success rate. Changes in the structure of the finance market have contributed to improvement in the lending environment for small businesses. New entrants have started moving into the vacuum created by large banks reluctance to lend to small firms in the aftermath of the crisis, when they were 32
www.fsb.org.uk repairing balance sheets. These alternative lenders often harness technology to develop new funding models, such as peer-to-peer lending and crowdfunding. Government, both at a national and European level, has introduced several new mechanisms to provide finance for small businesses; private-sector ventures such as business accelerators and angel investors have also assumed a larger role in this market. The outlook on this indicator is for further improvement. As finance experts still identify a funding gap despite the new market entrants, the British Business Bank has a key role in closing this gap for small businesses. 60% 55% 50% Figure 17: Proportion of small businesses successful in bank credit (e.g. loan or overdraft) applications in the past three months 45% 40% 35% 30% Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2015 Source: FSB-Verve Voice of Small Business Survey 33
FSB Voice of Small Business Index 2015 Credit affordability and availability return to positive trend The availability of credit to small businesses has risen. The net balance of firms rating it as good or very good rose from -40.7 in Q4 to -27.9 this quarter. This is in line with the increase in approval rates for finance applications from small businesses. This is the highest figure so far for credit availability, indicating that the efforts highlighted above involving conventional lenders, alternative lenders as well as public-sector actors, are achieving results for small businesses. The index of affordability has also risen from -27.6 last quarter to -20.7, in line with financing falling back as a source of cost growth and barrier to aspiration. This may also reflect the positive data on revenues, which suggests that firms cashflows have strengthened. Clearly visible in the availability data is a bias towards larger firms: sole traders and small businesses with fewer than 10 employees rate availability lowest at -28.7 and -30.9 respectively, while those with over 50 employees give a response of +6.5. This pattern carries over into credit affordability as well: businesses with over 50 employees rate this at +18.1 on the index, whereas those with up to ten employees rate it at -24.6. Figure 18: Indices of credit affordability/ availability perceptions over time, a weighted net balance of those with negative responses subtracted from those with positive responses -15-20 -25-30 -35-40 -45-50 -55-60 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2015 Credit availability index Credit affordability index Source: FSB-Verve Voice of Small Business Survey 34
www.fsb.org.uk Investment 24.9% of businesses report an increase in their capital investment this quarter. 35
FSB Voice of Small Business Index 2015 Post-recession investment growth shows signs of stabilising Small businesses investment intentions have fallen back on last quarter and on a year-on-year comparison, with a net balance of +24.9% reporting an increase in their capital investment compared to +26.6% at this point last year. The fall is minor and still shows a sizeable majority of businesses anticipating upping investment. The longer-term trend shows a stable, higher level of firms investing compared to the situation in 2012 and early. The recession was followed by a long period of underinvestment, which very likely harmed productivity. However, the significant rise since reflects the positive outlook among small businesses and the encouraging signs of a sustained build-up of investment. The Office for Budget Responsibility in its latest economic forecast predicted an 8.4% increase in business investment during 2015. The situation among small businesses, according to this sample, appears to support such a view. It also reflects better affordability and availability of credit to small businesses. Figure 19: Net percentage balance in anticipated capital investment growth over next 12 months share reporting increase less share reporting decrease 30% 25% 20% 15% 10% 5% 0% Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2015 Source: FSB-Verve Voice of Small Business Survey 36
www.fsb.org.uk Method This report is based on the January 2015 research survey of FSB members carried out by Verve. All panel members (4,908) were invited to take part in an online survey. Reminders were sent to all non-respondents. 1,630 responses were received, a response rate of 33%. 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 previous FSB Voice of Small Business surveys. The survey was undertaken between 21st January and 9th February 2015. 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 Q1 2015 is weighted differently to the FSB reports and therefore the results may differ slightly. For more information please contact erin.flood@fsb.org.uk 37
FSB Voice of Small Business Index 2015 Summary data table Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2015 Small Business Index 6.3 +15.9 +33.5 +21.6 +35.7 +39.7 +41 +17.6 +28.7 Employment - previous three months Employment - coming three months -4.2% -1.4% 3.7% 1.0% 2.1% +2.0% +5% +4.4% +4.2% 0.8% +4.8% 5.8% 3.1% 7.6% +10.5% +7% +7.1% +10.0% Revenue - previous three months -7.2% -0.4% 12.8% 18.8% 13.1% +18.1% +20% +22.0% +19.5% Revenue - coming three months 5.7% 11.3% 20.1% 16.2% 26.5% +29.6% +33% +23.4% +28.5% 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 13.0% 15.8% 21.1% 23.2% 26.6% +25.6% +26% +28.4% +24.9% 9.0% 9.7% 12.4% 12.7% 13.5% 12.5% 17% 13.3% 16.2% 71.1% 67.5% 65.9% 58.3% 58.5% 60.9% 52% 61.7% 50.4% 13.8% 14.1% 19.0% 18.1% 19.2% 18.0% 22% 18.1% 19.6% 59.7% 54.8% 55.0% 50.7% 49.8% 51.1% 47% 54.4% 46.4% The Small Business Index 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. 38
Federation of Small Businesses www.fsb.org.uk federationofsmallbusinesses @fsb_policy 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