Small business growth hits record high and momentum builds as economy reopens
19 Jul 2021
On the day that the economy reopens, NatWest’s UK Small Business Recovery PMI reveals that the UK’s businesses recorded a fourth straight monthly increase in output during June, with looser pandemic restrictions leading to a surge in customer demand. On average in the second quarter of 2021, the rate of business activity expansion was the fastest since the index began more than 23 years ago.
At 59.8 in June, the headline All-Sector Small Business Activity Index eased only slightly from May's all-time high of 61.3 and remained well above the crucial 50.0 no-change value. Across the quarter as a whole, the index averaged 59.9, up from 47.7 in Q1 and the highest since the series began in 1998.
The NatWest UK Small Business Recovery PMI® survey is compiled by IHS Markit and monitors the performance of businesses with between 1 and 49 employees.
Higher levels of business activity reflected a renewed upturn among small service providers, as well as faster rates of expansion in manufacturing and construction.
Small construction firms led the latest upturn in business activity (64.8 in June), helped by rapid increases in residential work and a boost from new commercial projects as the UK economy reopened.
Service providers benefited from pent up business and consumer demand in June, with output growth the second-fastest since July 2013 (60.0). Small manufacturers also registered a strong recovery, but supply disruption led to a slowdown in production growth to its weakest since February (55.9).
June saw a near record rise in new work at small UK firms, with all the three sectors posting sharp increases in sales volumes.
Greater workloads continued to place pressure on business capacity. Backlogs of work were accumulated at the steepest pace since this index was first compiled in January 1998. Survey respondents commented on staff shortages and severe delays with deliveries of raw materials. Small firms in the manufacturing sector signalled the worst month for supplier performance since this index began in January 1998.
Efforts to alleviate the strain on capacity resulted in strong job creation during June. Employment growth was only slightly slower than May's record high, with construction companies posting the fastest rise. Supply shortages, amplified by rising wages and transport costs, led to intense price pressures in June. Small businesses signalled that both input cost and prices charged inflation hit a survey-record high in June.
Concerns about cost inflation and constrained capacity contributed to a fall in business optimism to its lowest since February. Although still at an historically high level, small business confidence was also lower than seen in the rest of the UK private sector.
Small businesses throughout the UK see strong output growth during Q2
Encouragingly, the latest data pointed to sharp increases in business activity throughout the UK in the second quarter of the year amid a broad-based loosening of COVID-related restrictions.
Small firms operating in the North of England recorded the strongest output growth in the three months to June. Here, unlike in most other areas, the rate of expansion in business activity accelerated from May into June, completing the best quarterly performance on record.
Northern Ireland was the only other area where output growth continued to gather momentum, owing in part to its relatively delayed easing of COVID-19 restrictions that meant growth only returned in April – one month after most other areas.
Turning to the year-ahead outlook, all areas except the South West and Wales saw small business optimism ease at the end of the second quarter. Still, expectations remained strongly positive across the board, with small firms in the North of England recording the highest degree of optimism on average in the second quarter, followed closely by London and its surrounding areas.
Andrew Harrison, Head of Business Banking at NatWest, said:
“After a turbulent start to the year, it is really encouraging to see that small businesses across the UK have emerged from national lockdowns and achieved a swift turnaround in their order books. With growth now the strongest in more than two decades and the rebound now reaching all parts of the UK we have a real sense of momentum.
“However, there are clouds on the horizon and we need to ensure we continue to build back better, we must make sure that the small businesses which form the backbone of the UK economy receive the support they need to deal with cost pressures and staff shortages. At NatWest, we will continue to do everything we can to support the small businesses that form the lifeblood of our economy.”
Nick Stamenkovic, NatWest Economist, commented:
“As ‘Freedom day’ arrives and Scotland moves to Level-0 the re-opening of the UK economy has unleashed pent-up consumer demand, prompting a fourth consecutive monthly increase in UK small firms business confidence in June. All in all, the UK economy is enjoying strong growth at this juncture, but sharply higher delta COVID cases and the winding down of UK government support schemes pose downside risks near-term. Still, UK growth should return to pre-COVID levels by early 2022, if not earlier, aided by continued accommodating monetary and fiscal policy.”