UK SME optimism has reached its highest point for 11 months, with falling inflation and improving supply conditions boosting business confidence
Service economy drives growth, as manufacturing stagnates and construction activity falls
Prioritisation of climate action falls to its lowest point in over three years, with only 1 in 3 SMEs intending to take action in next 12 months
NatWest’s Q1 PMI index has reported that UK small and medium sized companies (SMEs) saw a return to growth in the first quarter of 2023, following a reduction in business activity throughout the second half of last year, according to the latest NatWest PMI survey data. At 54.3 in March, the headline All-Sector Business Activity Index signalled a solid increase in output volumes at UK SMEs. Moreover, the average index reading in the first quarter of the year (53.8) was much higher than seen in the final three months of 2022 (47.5).
The swift recovery in SME business activity largely reflects a strong upturn across the service economy. This sector recorded the fastest rate of expansion since April 2022, helped by improved business and consumer confidence, falling input prices and strong inflows of new business. In contrast, SME manufacturing output stagnated during March, and construction companies indicated a renewed decline in business activity.
Business expectations nonetheless continued to improve at UK SMEs, with overall optimism regarding the growth outlook reaching its highest for 11 months. Survey respondents often suggested that falling inflation and input prices, and improving supply conditions had boosted their confidence regarding the business outlook, although many noted continued pressure on operating expenses from rising wages.
Sustainability action plans at UK SMEs
Despite an improving outlook for business activity and inflation, SMEs indicated that their prioritisation of sustainability dipped again in the first quarter of 2023. At 36%, down from 39% in Q4 2022, the headline index measuring the percentage of SMEs intending to prioritise climate action over the next 12 months is now the lowest since the survey began in Q1 2020. Four out of five components of the Sustainability PMI decreased in the first quarter of 2023, with recycling the only exception.
In contrast, large enterprises (250+ employees) signalled another increase in their prioritisation of action on sustainability. At 67%, up from 64% in Q4 2022, the percentage of large firms citing sustainability action as a high priority was the greatest since the survey began three years' ago. Cleaner business processes was the top ranked area of sustainability action for large enterprises (75% of survey respondents cited this as a high priority).
James Holian, Head of Business Banking, NatWest said:
“It is encouraging to see SMEs reporting a return to output growth in Q1 of this year, following a challenging second half of 2022 that was compounded by wage pressures and increased running costs. Thankfully some of these pressures are now slowing, and businesses are reporting their highest confidence levels in over a year.
“However, it’s concerning that climate and sustainability efforts appear to have taken something of a back seat while SMEs have focussed on more immediate challenges. Green plans must remain a priority for all UK businesses, helping reduce their emissions and costs in the long term. As the UK’s biggest bank for business, NatWest is here to support SMEs with their next steps in climate and sustainability, and we encourage businesses to get in touch with us to find out how we can support.”
Annabel Fiddes, Economics Associate Director at S&P Global Market Intelligence said:
“UK SMEs had a strong performance over the opening quarter of 2023, with companies citing relatively resilient customer demand and improved confidence towards the economic outlook since last autumn.
The upturn was uneven at the sector-level, however, with a robust rise in service sector activity contrasting with stagnant manufacturing output and a fall in construction activity. This suggests the recovery is not quite on a solid footing yet, as firms continue to face strong inflationary pressure and tighter financial conditions via higher interest rates.
While there has been positive news in terms of cost pressures easing in recent months, helped by a substantial improvement in global supply chain performance, it is clear that falling real incomes will continue to squeeze UK household budgets and curtail non-essential spending in the coming months.”
Green energy investment plans
NatWest also asked UK businesses about their long-term plans for green energy investment, and only 8% of SMEs noted that they had already invested in more energy efficient business processes, with more than half (54%) intending to do so on a five-year horizon. This was slightly less than the percentage of large enterprises that plan to invest in more energy efficient business processes by 2028 (76%).
Upgrades to energy efficiency of business premises (58% of SMEs) and investments in electric vehicle infrastructure (54%) are also expected by the majority of survey respondents within the next five years. Meanwhile, only 7% of SMEs note that they have invested in onsite green energy generation, but this figure is anticipated to rise sharply to 38% by 2028.
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