Following a weak start to the year, our Q2 SME Confidence Tracker indicates that UK SMEs have performed better this quarter, but this has been tempered with caution. The good news is that nearly two fifths (37%) have increased investment, reversing a five-quarter decline seen since Q1 2018.
Despite this, SMEs remain cautious for the year ahead as sales expectations for Q3 remain flat at 42%. This is in line with levels seen in the last two years and suggests a seasonal trend, but time will tell if this is cause for wider concern.
Fear of a downturn remains a worry to many SMEs and exactly half (50%) believe the UK is likely to enter recession this year. However, this is a slightly improved outlook to that in Q1 when 57 per cent said they felt that the UK would experience a downturn in 2019.
This view is likely as a result of a combination of factors, including signals stemming from the trade war between the U.S. and China and the ongoing risk of Brexit.
The positive news is that a significant number of SMEs are carrying on with business as usual with a slight uptick in confidence. Additionally, despite Brexit woes, it seems that many businesses are still investing. According to the latest data, SMEs are planning to increase their capital expenditure from £64,600 to £81,000 and reverse declining spend since Q1 2018.
Evidence suggests that many SMEs were stockpiling goods in the run-up to the March Brexit deadline. The fact is that the new October deadline has left many SMEs in limbo. This is very likely a continuation of the theme I remarked upon in the first quarter – that Brexit remains a dead weight on what could otherwise be a robust economy.
This is further evidenced by what SMEs have been telling us this quarter. While many businesses continue to invest, over half (54%) have not done so due to the uncertain economic environment within the UK, and the same number due to uncertainty arising from the UK’s exit from the EU. The fact is, stockpiling can only last so long before its impact on cashflow becomes unsustainable.
As a result, nearly half (44%) have told us they are struggling with cashflow. Usually, a rise in the number of businesses investing would benefit the economy. But with SMEs facing increasing competition (15%), rising materials costs (17%) and the broader economy stalling, they appear to be sourcing finance to cope with these challenging conditions rather than investing for a brighter future.
Overall, there has been an uneven level of growth in the SME sector since the EU referendum and I would suggest that the primary cause of this has been a lack of stability both at home and abroad. UK SMEs are a diverse group working across many different sectors, but the common thread is that their growth depends on feeling confident enough to invest and expand. I’m in no doubt that they could perform even better if the political environment stabilised and the flow of goods, services and people were guaranteed to move easily to and from the UK’s shores.