The increase in activity is a further sign of operating conditions gradually improving following the lifting of lockdown measures. However, the pace of recovery remained uneven and lagged behind that seen among larger companies.

The new monthly index designed to monitor the performance of private sector enterprises with 1-49 employees showed that five times more of the UK’s small businesses reported growth in July (36%) than in April (7%).

At the same time, the number of small firms registering a decline in business activity was 28% in July, an improvement from 39% in June and down by more than half from the peak of 78% in April.

The headline All-Sector Small Business Activity Index – which monitors output at private sector companies with 1-49 employees – rose further in July from a record low in April, climbing to 53.3 from 42.5 in June. Being above 50.0, the index pointed to more small firms seeing an improvement in activity than a decline for the first time since February.

The latest reading signalled the fastest rate of growth for exactly two years. Nevertheless, the rebound was still slower than across the UK private sector as a whole (equivalent index at 57.1).

This was largely confined to the service sector, where small businesses recorded a return to growth after four months of contraction but continued to see activity curbed by restrictions on capacity and a reluctance to spend among customers.

Small manufacturers and construction firms enjoyed stronger growth than their larger counterparts in July, recording the steepest rises in activity for around six years and sixteen-and-a-half years respectively. There were reports of customer numbers increasing and a catch up on work delayed due to the lockdown.

July data showed that small firms faced strong and above-average cost increases. Pressures on this front remained especially acute in the construction and manufacturing sectors, linked in part to supply-chain disruption and rising transport costs. Service providers also noted a jump in operating expenses from recent lows, which they partly attributed to staff returning from furlough.

Small enterprises were more optimistic about the outlook for activity over the next 12 months in July. With many still operating below full capacity, workforce numbers continued to fall. In a step in the right direction, the decline in employment eased for the third month running to the weakest since March, which contrasted with an accelerated pace of staff cuts among larger firms.  

July data indicated that small companies in the service sector experienced a modest overall increase in business activity, following the deep retrenchment seen in the second quarter of 2020. At 50.8 in July, up from 40.3 in June, the Business Activity Index registered above the 50.0 no-change threshold for the first time since February. That said, small businesses remain on a slower recovery path than the UK service sector as a whole (equivalent index at 56.5 in July).   

Around 34% of small enterprises in the service sector reported an expansion of business activity in July, up from 23% in June and only 11% in May. Growth was overwhelmingly linked to the reopening of the UK economy and easing lockdown measures in July, particularly in customer-facing areas of activity.  

UK manufacturers with 1-49 employees recorded their strongest growth in business activity for just over six years at the start of the third quarter. The respective index registered 61.9, up from 49.8 in June and the first reading above the 50.0 no-change threshold since February.

The performance in July was better than that for the good-producing sector as a whole (equivalent index at 59.3, up from 50.7 in June), with the rate of growth also outstripping those recorded by small construction and services firms.

Where an increase in production was recorded (at 41% of firms), this was often linked to rising inflows of new orders as customers resumed work and ramped up operations. Surveyed businesses also commented on a boost to productive capabilities as staff were recalled from furlough.

Construction companies reported a sharp expansion of output volumes in July, with the Small Business Activity Index reaching 61.4, up from 49.5 in June. The index was above the 50.0 no-change value for the first time in five months and the latest reading signalled the fastest rate of growth since October 2003.

Survey respondents commented that the remobilisation of the construction supply chain and easing lockdown restrictions had underpinned a strong increase in business activity during July. Growth was reported in all main categories of construction work, with house building the best-performing area.

Susan Fouquier, managing director of business banking Scotland at the RBS, said: “Seeing growth of activity in small businesses in the latest Royal Bank of Scotland UK Small Business PMI is a positive sign of recovery, but overall, the data is still showing that smaller enterprises are lagging behind the activity seen among larger companies.

“Recognising this disparity, we want to be agile in our support to SME business customers as they face into the next period of uncertainty. Our Business Builder tool provides digital learning, virtual workshops and an online community to help our business customers scale and succeed. We also launched an initiative to enable customers to oversee, plan and protect their business with the integration of a market leading accountancy platform, FreeAgent, within our online digital banking platform.”