Gloomy start to 2018 for small firms

Small business owners are heading into 2018 with increased pessimism because of rising costs, weak growth and flagging consumer demand.

This is the sobering conclusion of the latest Small Business Index from the Federation of Small Businesses (FSB). The SBI stands at -2.5 in Q4 2017 - a fourth consecutive quarterly drop in the Index from a year-high of +20.0 in Q1 2017. It is only the second negative reading recorded in the past five years. The first (-2.9) was registered in the wake of the EU referendum.

Almost a third (31%) of small firms say they expect their performance to worsen over the next three months; a quarter (27%) anticipate an improvement.

The FSB also reveals that a record one in seven (14%) small business owners are planning to downsize, close or sell their business over the coming three months.

Three-quarters of firms (73%) report a rise in operating costs compared to this time last year. Meanwhile, the proportion of small businesses (41%) reporting a fall in profits is at its highest since 2013.

The domestic economy is the biggest barrier to growth, cited by 55% of those polled by the FSB. Consumer demand (34%), access to appropriately skilled staff (34%) and regulation (20%) were also flagged as key barriers to expansion.

Mike Cherry, FSB national chairman, said: "While the swift agreement of a transitional arrangement and an ambitious free trade agreement with the EU are absolutely critical, it's spiralling costs, weak growth and flagging consumer demand at home that are front of mind for small firms day-to-day. It's troubling to see a record number of entrepreneurs seeking an exit as these challenges prove too much for many."

Pessimism among small firms is particularly pronounced in the retail (-13%) and construction (3%) industries. Across both sectors, businesses report significantly lower levels of confidence compared to Q4 2016. However, exporting small firms remain optimistic about their prospects. The proportion reporting that international sales are stable or increasing (77%) is up four percentage points compared to the same period two years ago, having been high throughout 2017.

"Our exporters continue to benefit from a depreciated pound and strong economic growth overseas," said Cherry. "Nine in ten small firms that do business internationally trade with EU nations, so securing the right Brexit deal will be critical to maintaining their momentum."

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