Health of UK SMEs falls to lowest level in three years - Clydesdale Bank

The health of small and medium-sized enterprises (SMEs) in the UK has fallen to its lowest level in three years, according to Clydesdale Bank’s SME Health Check Index, a new quarterly economic index compiled in association with economics consultancy - Centre for Economics and Business Research Limited (Cebr).

The SME Health Check Index measures business performance and the macroeconomic environment affecting SMEs, including bankruptcies, business costs, capacity, confidence, employment, gross domestic product, lending and revenue.

In the first quarter of 2017, while SME business confidence rose markedly in the last quarter, taking into account the wider SME business environment, the Index overall fell by almost 10 points, from 56.4 in the final quarter of 2016 to 46.5, due to a number of factors including inflation outstripping wage growth which limited consumer spending, and weak currency that raised the cost for imported commodities and materials.

In Scotland, the Index fell to 44.6, leaving it in tenth position with the most indicators falling since Q4 2016. This figure highlights a challenging business and economic environment which has suffered following the global drop in oil prices. The labour market had also struggled in Q1 and Q3 2016 with employment numbers declining, however jobs were added during Q1 2017 which is encouraging.

Introducing the maiden report, David Duffy, CEO at CYBG, said: “Small and medium-sized businesses are the absolute engine room of the British economy, and their future prospects are going to be ever more critical in a post-Brexit world, where we are dependent on a stronger and more competitive domestic economy.

“It is vital that we understand how SMEs are performing. The creation of the SME Health Check Index brings together a range of indicators on the health of the UK’s SMEs for the first time and will be an important tool in helping understand how we can better support SMEs.”

“This research clearly indicates SMEs are facing challenges, but we want to further support our customers with robust insight that clearly explains where businesses are prospering, the areas of concern and identify trends are so we are in the strongest position to help. We hope this will lead to a more informed debate about how we can make these businesses succeed.”

The report found:

The quarterly index, which includes UK and regional breakdowns, is rated between 0 and 100, with a score of 100 indicating maximum positive conditions in the sector and the indicators on which it is measured.

Graeme Sands, head of business banking at CYBG, said: “It’s clear that SMEs faced a challenging start to 2017 with a number of indicators contributing to a weaker position. We will be watching closely to see how these numbers change during the course of the second quarter and if this dip is purely a temporary softening as is suggested in the report.”

Earlier this year, CYBG committed to making a minimum of £6 billion of lending available from 2017 to 2019 to help fuel the growth of SME businesses in the UK, underscoring the critical role that the banking sector plays in supporting new enterprises and cultivating established businesses.

Mr Sands said: “We understand the importance of SMEs to the UK economy and the varying challenges businesses are facing, particularly given our experience in the North of England and Scotland. The quarterly SME Health Check Index is an invaluable resource, especially as Britain’s position in the global economy continues to evolve.”

Oliver Kolodseike, senior economist at Centre for Economics and Business Research (Cebr), said: “With SMEs accounting for over 99% of all UK businesses, their significance to the wider UK economy is unquestionable. The new SME Health Check Index offers insight into the business and economic environment in which small and medium-sized enterprises operate by monitoring a number of relevant indicators.

“The results clearly point to challenging conditions faced by the UK’s SMEs during the first quarter of 2017. Business costs rose strongly while subdued lending and weaker than expected GDP growth also exerted downward pressure on the index. Encouragingly, however, business confidence and employment remain robust, adding to hopes that the weak reading of the SME Health Check Index in the first quarter was just a temporary blip, rather than the beginning of a more serious negative trend.”