Spiralling costs hampering small business growth, report finds

Natalie Gasson-McKinley

Hopes of a small business-led economic recovery from the pandemic may be under threat, according to a new report by the Federation of Small Businesses (FSB).

The body’s SBI report for Q2 2022 reveals that the combined proportion of small firms who predict that they will stay the same size (38.7%), downsize or even close their business (14.7%), at 53.4%, outweighs the 46.6% who predict they will grow in the coming 12 months.

The results differed by sector, with a better outlook for businesses in the information and communication sector, where 62.9% of businesses are expected to grow in the next year, compared with only 33.9% of wholesale and retail firms and 34.9% of hospitality sector businesses.

Small firms’ anaemic growth predictions coincided with the highest-recorded proportion of firms saying their costs are higher than a year ago, at 89.0%, and with the highest level of producer price inflation for four decades in June.

Fuel (cited by 64.2%) and utilities (63.5%) were the most-mentioned causes of this increase in costs, both up notably from the first quarter (60.1% and 58.0% respectively) and far higher than this time last year.

Two thirds of the businesses that do expect to grow (65.1%) cite the domestic economy as a potential barrier to expansion, a figure which has risen from 58.6% in the FSB’s Q1 report.

Lack of access to appropriately skilled staff was cited as a limiting factor by 33.9% of businesses that expect to grow.

With ONS statistics showing there were 1.3 million vacancies in Q2, many firms are not able to find the staff they need, putting normal operations and usual opening hours – let alone plans to grow – in question.

More positively, a net balance of 7.2% of respondents anticipate that their employee base will increase in size in Q3, although this is around half the number that said the same ahead of Q2 (14.5%).

Natalie Gasson-McKinley, FSB development manager, said: “The fall in GDP in the second quarter and the record-high inflation figures show the scale of what small businesses are up against, with our second quarter Small Business Index uncovering warning signs in many different indicators, from overall confidence to staff numbers and growth aspirations.

“Longer-term, those hopeful of solving the UK’s long-running productivity puzzle will not find much cause for cheer in this report, with small businesses held back from growing and investing by numerous factors.

“A healthy business ecosystem requires businesses of all sizes to be able to realise their ambitions – from one-person start-ups with a great idea, through the small and medium-sized businesses which form the bedrock of the economy, right up to the largest companies, who rely on countless smaller suppliers and service providers.

“With our research indicating that smaller firms’ intentions to grow are muted at best, with businesses planning to grow outnumbered by those expecting to stay the same size, shrink, or even close their business, a key driver of economic recovery is threatened.

“Inflation is higher than at any point for the last four decades, and is also acting as an inhibitor to investment – machinery, parts, software, tools, rents, and employment and operating costs in general are all increasing in price more rapidly than small businesses can run to keep up. It’s a toxic recipe for the future health of the economy.

“If the next Government wants to be able to level up the country, small business considerations must be at the heart of its thinking. Our members are looking for concrete help.”

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