Output at small UK businesses rose for the first time in six months during March – the strongest reading since November 2016, suggesting a swift return to growth as restrictions eased at the end of the first quarter.
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.
The recovery was led by small firms in the construction sector, with output among small firms rising at the fastest pace since June 2001. Small service sector companies recorded the steepest rate of activity growth for three years in March, which survey respondents linked to a surge in forward bookings and improved confidence due to the government's roadmap out of COVID-19 restrictions on consumer-facing businesses. In the manufacturing sector, the latest data showed that production continued to pick up from the slump seen at the start of 2021.
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.
Andrew Harrison, Head of Business Banking at NatWest, said: “The end of the first quarter saw small business activity bounce back for the first time since last September. These headline stats are a positive read as small business optimism for the year ahead hits an all-time high. However, we know that there are still challenges for the UK’s small businesses at a sector and regional level as, for example, supply chains for small manufacturers are causing upward costs pressures and small business optimism is being led by London and its surrounding areas. This data reinforces the findings from our recent SME Recovery Report and is why we committed £4 billion of support to SMEs outside of London to help them scale and grow, supporting the recovery of the wider UK economy.”
Small businesses upped their employment levels in March for the first time since the pandemic began. The rate of job creation was the fastest since January 2020 and this reflected extra hiring in all three sectors monitored by the survey.
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.
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.”