SMEs remain optimistic for long-term recovery despite a dip in growth in August, according to the latest edition of the Royal Bank of Scotland Small Business PMI report.
The monthly survey of businesses across the UK revealed recovery in activity stalled in August. The Headline All-Sector Small Business Activity Index slipped to 50.6, down from a two-year high of 53.3 in July.
Worryingly just above the 50.0 level that separates expansion from contraction. The data revealed a disquieting gap in performance between small enterprises and larger companies.
Job cuts in small businesses also continued, but the decline was weakest for five months and slower than in larger enterprises.
Small businesses cited cost reduction for redundancies and non-replacement of leavers. There was some positivity as some small firms reported staff returning from furlough and optimism about the longer-term business outlook.
Small business activity in the service sector stagnated in August.
Lack of new work to replace completed projects and limited scope to meet customer demand were cited as contributing factors. August’s PMI showed that the government’s ‘Eat Out to Help Out’ scheme, easing of lockdown measures and increased housing market activity in August provided a much-needed boost.
Output levels for small businesses in construction improved due to the loosening of lockdown measures and the subsequent return to work on site driving the latest uptick.
An continuing slide in new business is a worrying storm cloud for small constructing businesses and much more so than larger peers.
Manufacturing firms continued to report the strongest recovery among the UK’s small businesses in August, recording a more positive trend in output than both small service providers and construction firms. Despite falling from 61.9 in July to 53.5 in August, the index still signalled a solid expansion in production at small manufacturers.
Susan Fouquier, managing director of Business Banking, Royal Bank of Scotland, said:
“Our PMI data tells us that small businesses remain optimistic in their outlook for the longer-term, and it’s a positive sign that the rate of job cuts at this smaller end has eased over that of their larger competitors. However, small firms face different challenges to larger businesses, from supply chain issues to liquidity pressures, so this key part of our economy is not out of the woods yet.
“As the performance gap between small firms and larger companies widens, we continue to stay close to our SME customers and provide as much support as we can, including with over £7.2 billion approved through the Bounce Back Loan scheme.”
Supply chain disruption remained a challenge for small firms, particularly those operating in the construction sector. There was strong upward pressure on input prices, with rates of cost inflation continuing to outstrip those faced by medium- and large-sized firms. This continued to squeeze small business margins, but output prices did stabilise in August after falling in each of the previous five months.
Royal Bank of Scotland principal economist Stephen Blackman said: “The PMI shows that it’s hard to improve the first post lockdown flush of activity.
“But as this is a relative measure, it’s important to remember while trading for small firms hasn’t continued to accelerate, neither has it reversed.
“The experience of small businesses differs to that of businesses overall.
“While it’s hard to be certain what explains the gap between firm’s trading experiences, it’s probably a mix of sector, place and distribution.
“We know small firms tend to favour services, which have been slower to recover.
“But larger firms are also more likely to operate in national and even international markets, where places of uneven demand tend to average out. This is less true for many small firms.
“Small firms often serve specific customers in contained locations and tend to have less agency over external factors with fewer levers to manage disruption.
“The disruption to supply chains is biting, forcing small businesses to refocus attention away from customers towards inventories, logistics and supply and demand management.
“When you layer all these factors together, it suggests that small business both face additional hurdles in the new environment and that the variation in performance across small firms is likely to be greater than for their larger cousins.”