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Business Sentiment Index – small signs of optimism

When Close Brothers Asset Finance launched the Business Sentiment Index in April, it – unsurprisingly - showed business confidence was at a historically low ebb as the full economic and social effects of the pandemic were hitting home.

Click here to view the BSI update in full size

In no uncertain terms, confidence dropped like a stone, made all the more dramatic after the UK’s business community enjoyed a stellar start to the year as uncertainty around Brexit and the election was in the process of dissipating.

From a high of 28.75, the UK’s BSI had fallen nearly 80% to just 3.5, with the biggest fall seen in the Services sector, which entered negative territory for the first time (-6.25) following seven successive quarters of increasing confidence.

What happened next was not something many people would have predicted. There was an upswing, with business sentiment improving across the board – including Services.

From a low of 3.5 for the UK, it more than tripled to 12.25 despite the UK economy seeing its worst quarterly fall since Q3, 1979 (source: Office of National Statistics) while the general economic contraction was three times greater than the decline seen during the whole of the 2008 to 2009 economic downturn.        

The upturn in the BSI is mirrored by forecasting group, the EY Item Club, which believes April's sharp contraction is likely to have been the low point. They predict the economy will ‘return to clear growth in the third quarter with GDP expanding close to 10% quarter-on-quarter’ as lockdown restrictions are eased further.

As a reminder to anyone new to the BSI, it’s a score calculated and based on the results of a survey of 900 senior members of the SME business community and their:

  • Appetite for investment in their business in the coming 12 months
  • Access to finance and whether they’ve missed a business opportunity due to a lack of available finance
  • Views about the UK’s economic outlook
  • Thoughts on their likely performance in the coming 12 months 

To better understand what caused this uptick, I took a closer look at the data…

Appetite for investment

Of the four indicators, appetite for investment was the only one to decrease. This points to business owners’ understandable caution about the future – our research shows half of respondents will see ‘staying the same’ as a good – and expected – outcome.

Spending money on investment could be seen as too risky in light of continued uncertainty about the length and impact of the pandemic.

Missed opportunities

Encouragingly, there were fewer missed business opportunities as a result of the lack of available finance. This could be attributed, in part, to the impact of the CBILS (Coronavirus Business Interruption Loan Scheme), Bounce Back loan and furlough schemes implemented by the government.

In addition, many lenders were quick to get accredited by the British Business Bank to enable them to access government guarantees and continue lending.

Economic outlook

In comparison with the research from April, there are more business owners positive (53%) about the economic outlook than there are negative (47%).

However, given where we are in the economic cycle, it’s too early to draw any firm conclusions from the results and we will look to receiving and analysing future data before being in a position to provide concrete insights.

Predicted business performance

Despite a more positive outlook about the general economic performance, SMEs are less positive about their own prospects.

As many firms expect to contract as expand (24% each); however, on balance, this is likely as much as could have been hoped for.

Looking ahead, as lockdowns are lifted and sectors and countries gradually opening up, we would hope to see continued gradual uplift in the BSI but with so many factors at play, only time will tell.