CYBG SME Health Check Index finds market is stable, though a sharp fall in confidence reflects ongoing Brexit concerns

The latest figures from CYBG's Q3 SME Health Check Index have found that the SME business environment has remained broadly stable in the last quarter, having recorded 46.3 points, down 0.7 points from last quarter. Although the drop is not severe, the findings represent the second lowest level recorded since data collection began at the start of 2014. The low level recorded by the Index is largely driven by depressed business confidence across the quarter.

The decision by the UK Government to defer the vote on the proposed Withdrawal Agreement will likely lead to continued uncertainty for SMEs, impacting business confidence.

CYBG’s report, which is published in partnership with leading economic consultancy, the Centre for Economics and Business Research (Cebr), revealed that although the UK economy grew by 0.6 per cent – the fastest rate of quarterly growth rate since 2016 – market sentiment has been subdued. This will be partly attributable to the impact Brexit has had on SMEs outlook.

The most marked change was in SME confidence, which fell sharply by 23 points to 34 ‐ the third lowest ever recording. Of the other research indicators, business costs and revenue also worsened. Putting the results into context, the highest overall score the Index has found was 87.3 in Q4, 2015 ‐ 41 points higher than recorded in this quarter.

Nevertheless, there has been positive movement in the latest quarterly figures, with UK SMEs reporting improvements in four of the eight of the performance indicators ‐ capacity, employment, gross domestic product and net business creation ‐ while the Index score for lending remained unchanged. In Q3, improvements in the retail sector alongside recoveries in manufacturing and construction contributed to the upticks in the GDP and capacity indicators.

Looking more widely at the UK landscape, six UK regions saw their SME Health Check Index score decline in Q3, believed to be largely because of business cost inflation and weakening confidence. Yorkshire & the Humber recorded the largest fall, following three consecutive quarters of improvement.

Bucking the trend, the North West of England was the stand out region and outperformed the capital, with its Index score rising by 13 points to 37. In comparison, London dipped by three points to the joint lowest it has been since record began.

Building further on this quarter’s research, Cebr has examined the potential impact of Brexit on the nations and regions, identifying which parts of the country are most at risk to some of the disruptions that could take place as part of Britain’s exit from Europe. The research is based on four indicators – exports, labour supply, imports and foreign / direct investment.

In order, the results are as follows:

1.       Wales
2.       Scotland
3.       West Midlands
4.       North East
5.       East of England
6.       North West
7.       East Midlands
8.       Yorkshire & Humber
9.       London
10.   South East
11.   South West

CYBG has found that the two regions most vulnerable to the changes Brexit could deliver are Wales and Scotland. However, the decision of the House of Commons to defer the vote on Brexit has extends the current uncertainty for SMEs.

Gavin Opperman, Group Customer Banking Director, at CYBG, said: “At a macro‐economic level, the UK appears to be faring well. Sectors which have previously struggled, such as construction and manufacturing, have shown marked improvement and the share of SMEs operating below capacity has also dropped. Framing this is relatively strong GDP growth, particularly impressive given other major economies have slowed.

“Given this seemingly positive backdrop, it would be reasonable to expect this quarter’s Health Check Index to reflect a more optimistic SME market, however the political and economic uncertainty driven by Brexit has sowed seeds of doubt and businesses have made it clear that they are unsure about what 2019 holds for them.

“Our report on the potential impact of Brexit provides a useful barometer on the key influencers for each area, allowing us to take both a regional and national view. However, our priority is to support all of our SME customers as they learn how Brexit will impact their supply chains, access to talent and trading relationships and we are committed to helping them continue their operations as best as possible as we all negotiate these unchartered waters.”