Staff hiring remains a bright spot for SMEs, despite dip in business activity

Activity at small and medium-sized businesses fell marginally in September, while new work and employment numbers continued to grow, the latest NatWest SME Growth Tracker has found.

The NatWest UK SME Business Activity Index – which measures month-on-month changes in the combined output of SMEs – scored 49.3 in September, down from 50.3 in August. The latest reading was the lowest since October 2023 and signalled a marginal drop in SME output levels. This contrasted with solid growth across the UK private sector as a whole in September (index at 53.0). A reading of over 50.0 indicates growth, while a reading under 50.0 suggests contraction.

Business activity differed widely by sector in September, with the drop in overall SME output largely driven by the service economy. Construction SMEs bucked the trend, with output growth accelerating to its fastest rate since January. These firms saw the strongest rise in new business in two-and-a-half years, in part due to a post-election rebound in clients’ willingness to spend.

Despite the slight fall in business activity, there were positive signs from the survey’s forward-looking indicators as new order volumes expanded marginally and output growth expectations for the next 12 month were relatively upbeat. Job creation remained a bright spot and was maintained for the ninth consecutive month. And while strong margin pressures persisted in September, overall input price inflation was slightly lower than seen in the first half of the year.

While the overall degree of business confidence slipped to a 10-month low, SMEs remained upbeat about their growth prospects for the year ahead. Optimism was attributed to hopes of a sustained improvement in UK economic conditions, alongside a tailwind to business and consumer spending from lower borrowing costs.

Sebastian Burnside, NatWest’s chief economist said: “Business activity among SMEs has cooled in line with the change of season. However, this slight dip in activity shouldn’t hide what are strong signs of underlying good health. Businesses have maintained a strong streak in new orders for 10 months running and employment has been a strong point for SMEs all year. And while many businesses report their margins remain tight, inflationary pressures have softened since the start of the year.”

James Holian, head of business banking at NatWest, said: “Above all September’s survey shows how variable the experience of SMEs is depending on which sector they operate in. Construction firms have just recorded their strongest rise in new work for two-and-a-half years, while services companies have recorded their fastest fall in activity in a year.

“Across the UK, NatWest Group is helping more businesses get started than any other bank, so we have a deep understanding of the local economies in which they operate as well as the opportunities and challenges they face. We’re committed to supporting businesses to thrive and are confident that with our help, businesses can maintain a positive outlook as we move towards the final quarter of this year.”