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Storm clouds
Published in October, our Q3 SME Confidence Tracker report indicated that small and medium sized businesses (SMEs) were expecting storm clouds on the horizon. Our latest data for Q4 paints an even gloomier picture for SMEs as we enter an unstable global outlook at the start of 2016.

Almost a third say the uncertain UK economic environment is holding them back from future investment and this echoes the Chancellor’s warning that the UK economy faces a “dangerous cocktail” of economic risks from volatile stock markets to low commodity prices.

Perhaps as a result of this uncertainty, only 36% of SMEs said they were planning to invest in their businesses during the first three months of the year. This dampened feeling is also reflected in growth expectations which have fallen sharply from two years ago.

Only 36% expect growth in 2016 compared with 64% in Q1 2014. Alarmingly, one in five expect declining sales this year. Taken together, these responses suggest that SMEs feel the economic recovery to be slowing, a sentiment supported by ONS data which shows growth in the UK economy slowed in the third quarter from 0.5% to 0.4%.

SME issues

Looking at the specific challenges faced by SMEs, late payment remains as chronic as ever. This could exacerbate the UK’s woes even further if it continues to place a strain on SME cashflow. Other challenges faced by small businesses in the UK include increased competition and a lack of domestic demand – problems often associated with a difficult economic environment.

Where business owners are prioritising investment, their focus has been on “business as usual” activity, such as updating outdated equipment and spending to keep ahead of their competitors.

Recruitment decisions also point to a general maintenance of the status quo rather than upskilling or diversifying their workforces – again pointing to a potential downturn. After a difficult Q3 and the continued slump in confidence in Q4, these muted activities suggest that SMEs are preparing for a storm ahead.

Is manufacturing breaking the mould?

One patch of blue amid the dark clouds is in the manufacturing sector, which has the most optimistic outlook for Q1 with 41% of SMEs in the sector expecting an increase in sales, compared to the national average of 36%. Findings of the Tracker show that manufacturing also led the way in investment with two-thirds planning to invest in their business in Q1 2016.

However, this sentiment among small manufacturers, isn’t shared across the wider sector and this week, EEF reported that 44% of manufacturers included in its annual executive survey said their organisation faces more downside potential than upside.

Amidst growing concern over the stability of the global economy, it is clear that cross-sector business confidence in the UK is waning. Only time will tell whether these fears will be realised and until such time, both government and the wider business community will keep a watchful eye on the situation.