Employment Growth Hits Four Month High

Business activity at UK small and medium-sized enterprises (SMEs) stalled in June with the NatWest SME Purchasing Managers’ Index recording 49.9, ending a seven-month period of sustained growth. Some surveyed SMEs suggested that decision-making among customers had slowed in the run up to the general election, which led to delays with new projects and subdued domestic demand.

Key Findings:

• Output levels broadly unchanged as customers delay decision-making in June

• Employment growth at its fastest since February as SMEs backfill vacancies

• 36% of surveyed SMEs reported sustainability actions as a high priority in the next year

• Just under a third of UK SMEs (29%) plan to at least partially switch to UK suppliers in the next five years

NatWest’s index is a key indicator of the health of the UK SME economy. A PMI reading over 50.0 indicates growth or expansion, while a reading under 50.0 suggests contraction.

Despite the slowdown, employment growth was its fastest since February as improved candidate availability allowed firms to fill vacancies and replace departed staff. Hopes of a broader economic recovery, lower borrowing costs and a post-election rise in demand also kept business confidence upbeat at 70.3 in June. Confidence levels among small businesses were close to those seen among large firms and much higher than the low of 56.2 recorded in October 2022.

Sebastian Burnside, NatWest’s Chief Economist said: “Business activity stalled in June, rounding out a solid second quarter performance overall. A slowdown was to be expected after a strong start to the year and especially rapid GDP growth of 0.4% in May. But some small businesses also pointed to the General Election as a factor which delayed decision-making among their customers and led to subdued domestic demand."

“Price rises have eased in recent months, but businesses and their customers are still feeling the squeeze. Higher staff costs, particularly due to the rise in the National Minimum Wage, have meant services firms have had to pass additional costs onto their customers. Manufacturing firms also attributed higher input costs to rising transport bills, especially for container freight from Asia."

“However, business confidence remains high and job creation is at its highest level for four months. With inflation now back to the Bank of England’s target of 2% many firms are

hoping for lower interest rates and an increase in demand from the consumer sector.”

Sustainability goals across UK SMEs appeared somewhat on the back burner in the second quarter of 2024, as just 36% of the surveyed businesses reported sustainability actions as a high priority in the coming 12 months. While the headline figure was unchanged on the quarter, it remained notably below that seen when the survey first began in early 2020 (44%).

However, the latest survey data showed that small and medium-sized businesses are keeping up with and in some cases, outperforming larger firms in terms of having already implemented greener action regarding their supply chains. 12% of UK SMEs have already at least partially reshored their supply chains, compared to 7% of large companies.

Nearshoring – switching to suppliers which are geographically closer to the UK, but not in the UK – has also now been undertaken by 30% of surveyed SMEs, compared to 22% of larger companies. Notably, almost a third of SMEs (29%) reported plans to switch to UK-based suppliers within five years, in some cases prompted by shipping disruptions linked to the Red Sea crisis.

Commenting on these findings, James Holian, Head of Business Banking at NatWest Group, said: “We’re seeing that a sizeable minority of SMEs – some 30% - have already moved their supply chains closer to the UK, and 12% have already at least partially switched to UK-based vendors. And when you look at the next five years, just under a third of SMEs are planning to reshore their vendors."

“There are various reasons SMEs might move their suppliers to closer to home – not least to drive down costs, lower their carbon footprint and reduce their risk exposure to geopolitical events. However, there is never a one-size-fits-all solution. My advice to SMEs is to map your mix of suppliers and identify any gaps. Look at where the goods come from, where they go to, and what the capacities of your suppliers are. Speak to suppliers to understand their challenges and work together to develop solutions.”