Solid expansion of UK SME business activity so far in 2024

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Business activity among UK SMEs has expanded at a solid rate throughout the first quarter of the year with the NatWest SME PMI Business Activity Index recording 52.6 in March.

NatWest’s index is a key indicator of the health of the UK SME economy. A PMI reading over 50.0 indicates growth or expansion, while a reading under 50.0 suggests contraction.

The recovery in overall SME output levels was driven by improving order books, with new work increasing for the fourth month running in March. Leading the way, the services sector recorded the fastest upturn in business activity in March, recording 53.2, followed by the manufacturing sector, which recorded 51.4. SME construction output meanwhile near-stabilised in March at 49.6, which also represented an improved trend after stronger declines in activity in the second half of last year.    

In the latest survey, SMEs reported another sharp rise in their average cost burdens, especially those in the service economy, largely due to rising salary payments and transportation costs. However, the overall rate of input price inflation was the slowest since November 2023. Efforts to alleviate margin pressures nonetheless led to the fastest rise in prices charged by SMEs since June 2023. 

Business activity expectations remained upbeat in March, with SMEs confidence holding close to February's two-year high. 

Renewable energy investment plans 

The NatWest Sustainable Business Tracker found that there was a rise in the proportion of SMEs that have already invested in renewable energy investment plans compared to the same period in 2023.

UK SMEs were most likely to report plans to invest in more energy efficient business processes over the coming 12 months. Currently, 11% of small and medium-sized enterprises have already invested, a slight uptick from the 8% recorded during the same period last year. Additionally, 18% of SMEs expect to invest within the next 12 months and the longer-term outlook is much more upbeat with 41% intending to invest within five years.

The survey also found that over half of UK SMEs plan to spend on EV infrastructure or have already done so. Of all six categories monitored by the survey, the use of electric vehicles (or installation of their charging points) recorded the largest proportion of SMEs that have previously invested (18%), with an additional 29% expecting to invest within the coming five years. 

Sebastian Burnside, NatWest Chief Economist, said: “Businesses have shown great resilience in the face of challenging market conditions as rocketing inflation and then rising interest rates made their mark. So, it’s good to see that firms are now reporting much more muted inflationary pressures at the same time as five months of growth in a row.  When it comes to job creation, the picture is more varied. Higher levels of SME employment largely reflects greater recruitment in the service economy, while hiring trends were much more subdued in manufacturing and construction. But optimism about future activity is widely shared with both services and manufacturing registering scores of above 70.”

James Holian, Head of Business Banking at NatWest Group, said: “It’s really encouraging to see small businesses have had a strong start to the year and remain optimistic about their future growth. The recovery in output has been driven by improving order books, with new work increasing for the fourth month running in March. This suggests that falling inflation and hopes of lower interest rates is leading to an upturn in economic conditions, which is likely to support growth in the year ahead.

“These findings show that over half of UK SMEs plan to spend on electric vehicle infrastructure or have already done so. As well as the environmental benefits, many businesses stand to benefit financially in the long term by transitioning their fleets. In partnership with Diode, we are supporting our customers to access a tailored EV readiness assessment that breaks down the costs and potential return on investment of electric vehicles, so business owners can make the right decision for their individual circumstances.”   

The NatWest Sustainable Business Tracker is a quarterly report, designed to monitor business performance and sustainability actions at UK enterprises with 1-249 employees. Results are compiled from responses to S&P Global UK Purchasing Managers’ Index (PMI) surveys. The latest report includes a special feature on renewable energy investment plans across six categories.