Outlook for SMEs looks tough as SME Index falls to lowest level in 3 years

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11/12/2017

The Q3 2017 SME Health Check Index finds that:

• SME Health Check Index falls to lowest level since January 2014 - falling from 56.3 in Q2 of 2017 to 46.9 in Q3
• Six out of eight Index measures have worsened in last quarter - employment, revenue, confidence and net business creation indicators are all down
• SME business costs increased by 2.5% this quarter, with many SMEs unable or unwilling to pass this cost on to customers
• Business confidence among SMEs at lowest level since EU Referendum
• The North East, West Midlands and Yorkshire experienced the sharpest declines in their quarter-on-quarter performance

This quarter’s SME Health Check Index from CYBG, owners of Clydesdale and Yorkshire Banks and compiled in association with leading economics consultancy, the Centre for Economics and Business Research Limited (Cebr), has recorded its lowest score since January 2014, with the indicators for employment, revenue, confidence and net business creation all down compared to Q2. Businesses in the North and the Midlands are the worst hit – areas of the country that have been prioritised by the Government and where there already exists a substantial gap in growth compared to London and the South East.

A reading of 46.9 in Q3 2017 is the lowest since data collection for the Index began in 2014. Alarmingly, six out of the eight indicators in the SME Health Check Index have worsened since the previous quarter. The North East, West Midlands and Yorkshire experienced the sharpest declines, with the regions’ SME Health Check Index scores falling by 25.9, 16.8 and 15.4 points respectively.

Given the importance of SMEs to the health of the UK economy, this is concerning news, particularly when considering that previous drops in the Index have been aligned with a reduction in GDP growth. One of the factors influencing the Index is the drop in business confidence and uncertainty caused by a lack of clarity in Brexit negotiations, as well as the potential for further increases in interest rates. Reduced business confidence is also being reflected in the UK’s forecast growth, with the OBR now saying that GDP will not grow by more than 2% a year for the foreseeable future. In addition, there is still growth in business start-ups, but this is slowing, causing a drop in the net business creation indicator.

Small and medium businesses are essential to the productivity and prosperity of the UK economy. There are 5.7 million SMEs, employing 16.1 million people (60% of private sector employment) and they account for 51% of the UK’s total business revenue (£1.9 trillion a year). Sustained poor performance by SMEs could have a significant and long term negative impact on the economy. Given the recent drop in the SME Health Check Index, CYBG is calling on the Government to make changes sooner rather than later and do more to help businesses manage their costs and restore confidence.

Commenting on the report, David Duffy, Chief Executive Officer at CYBG said “The recent announcements made by the Chancellor in his Budget to help SMEs, especially on business rates, were very welcome. We also welcome the publication of the Industrial Strategy White Paper and the important measures this includes to build long-term prosperity, particularly outside of London and the South East. However, what is clear, is that more needs to be done in the short term to help boost confidence amongst SMEs while we wait for the longer-term benefits of some of these policies to take effect."

Earlier this year, CYBG committed to making a minimum of £6 billion of lending available from 2017 to 2019 to help fuel the growth of SME businesses in the UK, underscoring the critical role that the banking sector plays in supporting new enterprises and cultivating established businesses.

Oliver Kolodseike, Senior Economist, CEBR said “It is disappointing that SMEs are currently facing an increasingly challenging economic environment, with rising business costs continuing to act as a barrier to stronger business growth. Confidence and business creation are also down which is likely a result of the political uncertainty that persists. With the OBR recently revising down its growth and productivity forecasts for the coming years, SMEs may face a challenging 2018. ”

The SME Health Check Index measures business performance and the macroeconomic operating environment affecting SMEs, including net business creation, business costs, capacity, confidence, employment, gross domestic product, lending and revenue.

The quarterly SME index, which includes UK and regional breakdowns, is rated between 0 and 100, with a score of 100 indicating maximum positive conditions in the sector and the indicators on which it is measured.

1. Research

Following the data collection, the average of each individual series is calculated (such as employment, GDP etc.). In a second step, how many standard deviations a single data point is calculated (for example the employment data point for Q2 2017) deviates from its long-run mean. A scoring system is then applied, ranging from 0 to 100. A score of zero is assigned to the lowest observed value while the highest observation receives a value of 100. This means, the more standard deviations a data point is below the mean, the lower its score and the more standard deviations is above the mean, the higher its score.

This exercise is repeated for each of the eight sub-components. The eight individual scores are then combined with an equal weight to the SME Health Check Index.

A summary table of the sub-components can be found below:

Individual Indicators in the SME Health Check Index for Q3 2017

Regional breakdown of Q1, Q2 and Q3 SME Health Check scores

2. Clydesdale and Yorkshire Banks:

Clydesdale Bank was established in 1838 in Glasgow and has a proud history of innovation and support for Scottish industry and communities.

Yorkshire Bank, which has a strong personal customer base and an extensive business capability in the North of England and the Midlands, was founded in 1859 in Halifax, West Yorkshire.

3. Centre for Economics and Business Research (Cebr)

The Centre for Economics and Business Research is an independent consultancy with a reputation for sound business advice based on thorough and insightful research. Since 1992, Cebr has been at the forefront of business and public interest research. They provide analysis, forecasts and strategic advice to major UK and multinational companies, financial institutions, government departments and agencies and trade bodies. For further information about Cebr please visit www.gov.uk.