According to the latest NatWest UK Small Business Recovery PMI® survey, which monitors the performance of businesses with between 1 and 49 employees, the headline All-Sector Small Business Activity Index rose from 46.7 in February to 55.8 in March, compared with a low of 40.5 at the start of national lockdown in January. Any figure above 50.0 indicates growth.
Small businesses operating in London and its surrounding regions (South East and East of England) recorded the strongest performance during the opening quarter of the year. It was the only monitored area where small business activity rose on average – albeit only marginally. This reflected not only a strong upturn in output in March ahead of easing lockdown restrictions but also a relatively shallow downturn at the start of the year.
Expectations towards the year ahead are also the highest in London and its surrounding regions, closely followed by the North of England which also saw a trend in expanding workforce numbers. Although disparities across the regions remain, they have narrowed considerably in recent months. Notably, small business confidence in Northern Ireland has started to close the gap with the rest of the UK after trailing far behind at the beginning of 2021.
Within the manufacturing sector, SMEs recorded a strong increase in new business from abroad in the final quarter of 2020, helped by improving global economic conditions and pre-purchasing by EU clients ahead of the Brexit transition deadline on 31st December.
However, the latest PMI data indicates a swift reversal of this upward trend, with lower sales among small and medium sized enterprises the key factor behind ongoing weakness in overall UK manufacturing export orders. Those with 1-49 employees reported by far the fastest downturn in new orders from abroad and were the only segment to recorded declines in each of the first three months of 2021. At 44.4, the average reading in Q1 compared with 47.9 for medium sized firms and 58.9 for large manufacturers. All three company size bands experienced softer export trends at the very beginning of the year, but the largest manufacturers (250+ employees) saw a growth rebound thereafter. This contrasted with the monthly trend for small manufacturers, as the slide in exports accelerated during February.
Manufacturers widely noted that new trading arrangements with EU clients had a severe impact on sales throughout the first quarter. This mirrored the evidence cited by UK exporters in the latest ONS Business Insights and Conditions Survey (BICS), which found that additional paperwork (71%), changes in transport costs (46%) and customs duties/levies (36%) were by far the biggest export challenges faced by manufacturers in March.
Higher demand placed pressure on supply chains already struggling due to pandemic disruptions and Brexit trade frictions. Small manufacturers recorded the longest lengthening of supplier lead times since this index began in 1992. This led to intense inflationary pressures and placed extra strain on cash flow in March. Measured overall, small businesses recorded the steepest increase in input costs for a decade.
Small manufacturers also saw falling overseas sales in each of the first three months of 2021. In contrast, there was resilient export order growth at large firms. Manufacturers widely noted that new trading arrangements with EU clients had a severe impact on sales throughout the first quarter.
The planned easing of pandemic restrictions provided a boost to business optimism towards the year ahead outlook in March. Optimism among small firms was the strongest since this index began in July 2012, with growth expectations especially high in the construction sector amid a surge in demand for work on residential projects.
Richard Hill, Head of Automotive and Manufacturing at NatWest, said: “UK manufacturing has demonstrated great agility and ability to innovate in times of great challenge with the strength of recent PMI ratings showing the resilience of the sector. However, as the latest NatWest UK Small Business Recovery PMI survey shows, both Brexit and Covid-19 have caused significant disruption as smaller manufacturers recorded a steep fall in export orders, which was in contrast to their larger competitors.
"Throughout the pandemic, we have seen first-hand across a wide spectrum of manufacturing clients a steely determination to work through these challenges of pressured supply chains and impeding productivity. Business confidence levels are strong as we move into a more positive environment, particularly as manufacturers realise the opportunities that the sustainability, climate change and digital adoption agenda presents. The recent Super-Deduction initiative is a great example of the type of progress support required.”
Stephen Blackman, NatWest Principal Economist, commented: “The most eye catching improvement for the UK’s small businesses was a marked increase in service sector activity output. Just as the service sector was the main casualty during the pandemic, so the largest sector of the UK economy should be the main beneficiary of the gradual reopening of the UK economy in coming months. Witness the 0.2% monthly rise in service sector GDP in February, driven by higher retail and wholesale activity.
“With the advent of spring and the hopeful prospect of higher temperatures, this bodes well for a further improvement in small business activity in Q2 and beyond. Overall, the outlook for the UK economy is brightening and with the IMF recently upgrading its forecast for UK growth, this suggests lost output in the UK will be recovered sooner than previously expected, possibly in early 2022.”
