SME Health Check Index at second lowest level in three years

The latest figures from CYBG’s SME Health Check Index show that the health of UK SMEs was stable for the second quarter of 2018, but at 47.1 points, the Index is at its second lowest level in three years.

Although four of the eight indicators ‐ GDP, capacity, net business creation and business confidence – improved, business costs, employment and lending dropped, resulting in the Index dipping by half a point. The revenue indicator remained the same.

Key findings from the SME Health Check Index, which is published in partnership with leading economic consultancy, the Centre for Economics and Business Research (Cebr), shows the economy did regain some momentum in Q2. Following the wide spread disruption caused by adverse weather at the start of the year, activity was pushed into the second quarter, particularly in the retail and construction sector. However, despite the improvement in the GDP and capacity indicators, the slowdown in employment growth and fall in lending meant that there was no material change in the Index in Q2.

The report also looks into SMEs’ investment plans, with YouGov survey results revealing more than half (51%) of SMEs have chosen not to increase their investment spending over the last 12 months, suggesting weak sentiment in some businesses.

In the regions, six of the 11 areas experienced an improvement in the SME Health Check Index, while five declined. The largest gains were in Yorkshire & the Humber – continuing its momentum from the previous quarter – and the East of England, which recovered from a large fall last quarter. At the other end of the spectrum, the South East and North West saw the biggest drop, the latter in part due to the manufacturing sector going into a technical recession.  There is also the impact of the troubled introduction of Northern Rail’s revised timetable, which is estimated to have cost the region’s economy £38 million this summer.

Gavin Opperman, Group Customer Banking Director, at CYBG, said: “The latest SME Health Check Index demonstrates just how much can change for SMEs quarter to quarter. Our last report indicated a difficult start to 2018 and the weather conditions didn’t help matters, so this quarter provides some grounds for optimism. GDP and capacity have made gains, and the Index remains steady, dropping by only 0.5 points. This all suggests the UK economy could be on the road to recovery.

“However, on a closer look, there are still indicators causing concern, which doesn’t provide as positive a story. Employment growth is down, due to a tightening in the labour market, and, most important for us, lending has also dropped 18 points to 38. Our critical task is to ensure that the operating environment for SMEs – exporters, importers and entirely domestically focused businesses alike – is as uninterrupted as possible. As a lender, we are doing our bit and remain committed to supporting SMEs navigate this challenging market and are on track to meet our £6bn three‐year lending pledge.”

The report also includes a special report into SMEs’ investment plans. Business investment accounts for around 9.5% of the UK’s GDP and strong levels of investment are crucial in achieving sustained improvements to the productive capacity of an economy. This area provides interesting context to the wider story as business investment is strongly linked to the lending and revenue indicators.

In a YouGov survey of 500 UK SMEs, commissioned for CYBG on business investment, more than half of SMEs (51%) have not increased their investment spending in the last year, while a quarter (26%) have increased the level of their investment spending. 16% confirmed they had reduced their investment expenditure, with two in five (41%) blaming this on Brexit‐related uncertainty.

Looking to the future, nearly half (46%) expect their investment to stay at the same level over the next year, while 30% expect to increase their spending and 15% forecast a reduction in the next 12 months.

Gavin added: “The special report into SME investment trends demonstrates the impact the current uncertainty is having on businesses. It’s encouraging that more SMEs have increased their investment spending over the past year than have decreased – but with the close to a majority confirming that the investment would remain stable, it’s clear the UK is still seeing weak productivity growth, which has never fully recovered from the financial crisis.

“Hopefully the timetable on Brexit will impose some clarity and allow British businesses to plan accordingly. Although I think we are in for some level of uncertainty for the foreseeable future.”