Business Activity Stalls as Decision-Making Delays
Business activity at UK small and medium-sized enterprises (SMEs) stalled in June. The NatWest SME Purchasing Managers’ Index® recorded a reading of 49.9, ending a seven-month period of growth. SMEs attributed the slowdown to delays in customer decision-making, influenced by the upcoming general election. These delays resulted in project setbacks and weaker domestic demand.
The NatWest PMI serves as a crucial indicator of the UK SME economy’s health. A reading above 50.0 signifies growth, while below 50.0 indicates contraction.
Strong Employment Growth Despite Slowdown
Despite the overall economic slowdown, employment growth reached its highest level since February. Improved candidate availability enabled firms to fill vacancies and replace departing staff. Business confidence remained robust at 70.3 in June, buoyed by hopes of economic recovery, lower borrowing costs, and anticipated demand after the election. This level of confidence is comparable to that among large firms and much higher than the 56.2 recorded in October 2022.
Economic Outlook and Cost Pressures
Sebastian Burnside, NatWest’s Chief Economist, noted: “June saw a stall in business activity, wrapping up a strong second quarter. This slowdown followed a vigorous start to the year and rapid GDP growth of 0.4% in May. The General Election likely delayed customer decision-making, contributing to lower domestic demand.
Although price rises have eased recently, businesses and their customers continue to face financial pressures. Increased staff costs, driven by the rise in the National Minimum Wage, have led service firms to pass on additional costs. Manufacturing firms have faced higher input costs, particularly due to rising transport bills, especially for container freight from Asia.
Nonetheless, business confidence remains high, and job creation is at its peak for four months. With inflation back to the Bank of England’s 2% target, many firms are optimistic about lower interest rates and increased consumer demand.
Sustainability Goals and Supply Chain Adjustments
In the second quarter of 2024, UK SMEs have placed sustainability goals somewhat on the back burner. Only 36% of businesses reported that sustainability actions are a high priority for the next 12 months. This figure remains below the 44% recorded when the survey started in early 2020.
Nevertheless, SMEs are advancing in greener supply chain practices. For instance, 12% of UK SMEs have partially reshored their supply chains, compared to 7% of large companies. Nearshoring, or switching to geographically closer suppliers, has been undertaken by 30% of SMEs, compared to 22% of larger firms. Nearly a third of SMEs (29%) plan to switch to UK-based suppliers within five years, partly due to shipping disruptions linked to the Red Sea crisis.
Expert Advice on Supply Chain Strategy
James Holian, Head of Business Banking at NatWest Group, explained: A significant number of SMEs—around 30% have moved their supply chains closer to the UK, with 12% switching to UK-based vendors. Over the next five years, nearly a third of SMEs plan to reshore their suppliers.
“SMEs are motivated by factors such as cost reduction, lower carbon footprints, and decreased risk exposure. I advise SMEs to assess their supplier mix, identify any gaps, and collaborate with suppliers to address challenges effectively.”