Confidence among small businesses recovered strongly in the first quarter of 2023, but the cost of living squeeze continued to halt growth.
Sentiment improved among small business owners over the first quarter, with all major sectors seeing a rise in confidence, a Federation of Small Businesses (FSB) survey found.
However, the cost of living squeeze is still holding back growth, with 92% of SMEs facing higher costs in the first quarter than in the same period last year.
In relation to inflation, the majority of SMEs (92%) said their costs were higher when compared to the same period last year, with utilities being the main culprit (63%). This was followed by labour (45%), inputs (44%), and fuel costs (40%).
The FSB’s confidence measure scored minus 2.8 points in Q1 2023, with many citing the current economic situation as a major barrier to growth.
This is an upturn from the negative finding of -45.8 points recorded in Q4 of 2022 but is still some way below the 15.3 point level in Q1 2022.
Despite this, sentiment improved strongly among small business owners and sole traders, with all major industry sectors tracked in the small business index (SBI) reporting improvements in their confidence ratings.
Wholesale and retail, accommodation and food, manufacturing, and information and communication all saw major increases – although these sectors still remained in negative territory.
The professional, scientific and technical sector was the only major sector tracked by the FSB which ended up in positive territory, with a confidence reading of 14.9 points.
Companies viewed the revenue outlook for the next quarter with more optimism, with two in five SMEs (39%) forecasting sale rises, against one in four (26%) expecting a fall.
In addition, growth aspirations for the next quarter improved slightly, with 46% of SMEs anticipating growth in the next quarter, up marginally from 45% in Q4 2022.
Martin McTague, FSB national chair, said: ‘Our latest Small Business Index data shows that small firms may be about to turn the corner and rebound after the pandemic and the energy crisis, with confidence recovering alongside improved optimism for Q2.
‘However, there are still plenty of dark clouds on the horizon that could dampen small business recovery. The prospect of further interest rate rises is causing significant disquiet, at the same time that costs remain at serious highs.
‘If rate hikes outpace or outlast the prices they are meant to control, this would be an extra pressure on small firms whose cash revenues remain at historic lows, and it’s no surprise that small firms’ views of available finance options are downbeat, in line with their abilities to invest and grow.’
Exports suffered between January and March 2023, with around two in five small exporters (40%) reporting the value of exports falling, while only one in five (22%) increased.
SMEs stated the economy was the largest barrier to potential growth, which was noted by over three in five small firms (61%), followed by utility costs and consumer demand, which was cited by three in 10 (30%).
The FSB, which represents more than 150,000 business owners and self-employed workers, surveyed around 700 SMEs.
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