- SME Health Check Index reduced to 41.9 points in Q2, compared with 48.8 in Q1
- Labour market remains resilient as SMEs continue to hire
- Diversity of SMEs means they are well placed to deal with market conditions
The SME Health Check Index, a quarterly measure of performance and outlook for UK SMEs, fell by 6.9 points to 41.9 in Q2 2019, as economic and political uncertainty continued to weigh on business confidence. The study overall, however, reveals a mixed picture, with continued resilience in the labour market, and encouraging insights on business diversity.
The SME Health Check Index, which is published by CYBG in partnership with leading economic consultancy, The Centre for Economics and Business Research (Cebr), draws on data and qualitative information from a wide range of sources. It is designed to ‘take the temperature’ of the UK’s SME community as a whole, and provide a comprehensive overview of the challenges and opportunities it currently faces.
The reduction in the headline figure was driven by falls across the majority of indicators comprising the Index, including the first quarterly contraction in GDP in Q2 since the final quarter of 2012, as well as declines in capacity, lending and net business creation measures.
However, there was more positive news for employment, with the relevant indicator rising by 5 points, as SMEs continued to hire. Employment reached 32.8 million in Q2, 114,000 higher than in Q1 and 425,000 higher than in Q2 2018.
The SME Health Check Index also shows the regional variations over the last quarter. Eight of the 11 regions measured saw declines, in line with the reduction in the overall Index. London and Yorkshire & the Humber recorded the biggest regional reductions – primarily driven by falls in GDP and business confidence, as well as an increase in the share of SMEs operating below capacity. However, Scotland and the South West of England both bucked the national trend by each recording significant index increases, driven by strong performance across confidence and capacity indicators north of the border, and sentiment and employment in the English region. The East Midlands was the only region to remain stable compared with Q1.
SME diversity offers protection as tough conditions persist.
In a special report this quarter, the Health Check Index also examines how the complexity and diversity of UK SMEs enhances their ability to deal with the ongoing political and economic uncertainty. Looking at companies from a range of perspectives – including diversity in products, customers, suppliers, geography and workforce composition – the research sought to ascertain how far companies have protected themselves from sudden disruption or shocks.
The research found some regional variation in the diversity of the industrial base across the UK. The most diverse business populations are in the West Midlands and Yorkshire & the Humber, which have an established presence in the manufacturing and construction sectors together with a spread of activity throughout the services sector. London leads the way when it comes to product complexity and workforce diversity, with only one in six SMEs in the capital reliant on a single product for most of their revenues. Meanwhile, regions in the extremities of the UK such as the South West and Scotland perform less well in geographical diversity, with the vast majority of SMEs surveyed operating solely within one region.
Gavin Opperman, Group Customer Banking Director, at CYBG, said: “The health of UK SMEs is pivotal to the success of our wider economy, and the picture painted by the results this quarter was mixed. We saw a fall in the headline index to 41.9 in Q2 2019, as businesses were tested by heightened uncertainty, moderating economic growth globally and rising costs. Declines were recorded across GDP, business lending and confidence indicators, amongst others.
“While on the surface things may look a little gloomy, cause for optimism can be found. The labour market has remained resilient, with SMEs continuing to hire, and wages continuing to grow, despite the tougher conditions. Further, an analysis of workforce composition, customer base and supplier relationships has revealed some encouraging insights on SME diversity across many parts of the country, indicating a good ability to handle sudden change or shocks.
“Here at CYBG we are committed to helping UK SMEs prosper and grow. We are optimistic that with a careful strategy and access to adequate support, businesses have the resilience to weather the storm.”