October data from the NatWest UK Small Business PMI® highlighted a reversal of fortunes for small enterprises, with overall business activity declining for the first time in four months. This contrasted with a steady recovery during the third quarter of 2020 and was led by shrinking service sector output.
NatWest will today launch its SME Transformation Taskforce in response to the latest data. The launch meeting, co-chaired with the Federation of Small Businesses (FSB), will bring together policymakers, business groups and others to share insights and discuss recommendations of support to spark growth back into this key part of the economy.
Andrew Harrison, Head of Business Banking at NatWest, said: “Small businesses are operating in a challenging environment and this is evident in the latest PMI data which shows that activity has contracted for the first time since June. Recognising the difference between larger firms, which comparatively saw growth in October, and smaller firms, we’re convening an SME Transformation Taskforce with business groups and politicians to collaboratively discuss and develop the right support mechanisms needed to bring SMEs back to growth.”
Small businesses were the hardest hit by weak and contracted activity in October with the All-Sector Small Business Activity Index registering at 47.0 – below the 50.0 no-change level. Larger businesses and the rest of the UK private sector, however, were still in growth with an equivalent index of 52.2 in October.
Service providers with less than 50 employees saw the biggest impact in October (index at 46.8). The rate of decline exceeded that reported by small manufacturing (47.1) and construction firms (48.7).
Consumer-facing service providers widely linked lower output to tighter restrictions on social mobility and hospitality amid a resurgence in the number of COVID-19 cases. Consequently, many small service sector firms saw a downturn in forward bookings even before the announcement of circuit breakers and national lockdown measures across the UK.
Small manufacturing companies experienced a renewed drop in output during October, which contrasted with growth across the sector as a whole. Falling production was mostly attributed to weak customer demand due to the pandemic, although in some instances manufacturers simply cited an end to working through backlogs from the spring.
Construction was more resilient than other parts of the economy in October, but small companies continued to trail behind larger enterprises. Lower levels of activity were partly linked to the completion of catch-up work, according to survey respondents.
Employment trends among small companies remained less negative than those reported by larger enterprises during October. The overall rate of job shedding at small firms was only slightly faster than in September, but still much softer than in the second quarter of 2020. Despite seeking to retain staff where possible through the pandemic, latest data indicated that year-ahead business expectations among small firms (index at 61.0) continued to trail well behind those seen across the UK private sector as a whole in October (66.9).
Stephen Blackman, NatWest Principal Economist, commented: “The short-lived recovery in UK small business output came to a halt in October with the PMI dipping back into contraction territory, ending a three-month streak of positive readings as the introduction of local lockdowns and further restrictions took its toll on activity.
“Business confidence looks set to remain in the doldrums, keeping companies in a cautious mode amid continued weak demand and nervousness around Brexit. Latest reports of a vaccine being rolled out in early 2021, if not earlier, points to light at the end of the tunnel for the UK’s struggling SMEs, but it’s still early days.”