Stephen Blackman

According to the survey, which monitors the performance of businesses with between 1 and 49 employees, the headline All-Sector Small Business Activity Index rose from 46.7 in February to 55.8 in March, compared with a low of 40.5 at the start of national lockdown in January. Any figure above 50.0 indicates growth.

The recovery was led by small firms in the construction sector, with output among small firms rising at the fastest pace since June 2001.

Small service sector companies recorded the steepest rate of activity growth for three years in March, which survey respondents linked to a surge in forward bookings and improved confidence due to the government’s roadmap out of COVID-19 restrictions on consumer-facing businesses. In the manufacturing sector, the latest data showed that production continued to pick up from the slump seen at the start of 2021.

The positive trends in small business activity in March extended to most areas, including Scotland where data showed output rising for the first time since last August - thanks in part to stronger demand.

Small businesses operating in London and its surrounding regions (South East and East of England) recorded the strongest performance during the opening quarter of the year. This reflected not only a strong upturn in output in March ahead of easing lockdown restrictions but also a relatively shallow downturn at the start of the year.

Expectations towards the year ahead are also the highest in London and its surrounding regions, closely followed by the North of England, which also saw a trend in expanding workforce numbers. Although disparities across the regions remain, they have narrowed considerably in recent months. Notably, small business confidence in Scotland has started to close the gap as optimism rebounded to its strongest for more than eight-and-a-half years.

Stephen Blackman, RBS principal economist, commented: “The most eye-catching improvement for the UK’s small businesses was a marked increase in service sector activity output. Just as the service sector was the main casualty during the pandemic, so the largest sector of the UK economy should be the main beneficiary of the gradual reopening of the UK economy in coming months. Witness the 0.2% monthly rise in service sector GDP in February, driven by higher retail and wholesale activity.

“With the advent of spring and the hopeful prospect of higher temperatures, this bodes well for a further improvement in small business activity in Q2 and beyond. Overall, the outlook for the UK economy is brightening and with the IMF recently upgrading its forecast for UK growth, this suggests lost output in the UK will be recovered sooner than previously expected, possibly in early 2022.”

Small businesses upped their employment levels in March for the first time since the pandemic began. The rate of job creation was the fastest since January 2020 and this reflected extra hiring in all three sectors monitored by the survey.

Higher demand placed pressure on supply chains already struggling due to pandemic disruptions and Brexit trade frictions. Small manufacturers recorded the longest lengthening of supplier lead times since this index began in 1992. This led to intense inflationary pressures and placed extra strain on cash flow in March. Measured overall, small businesses recorded the steepest increase in input costs for a decade.

Small manufacturers also saw falling overseas sales in each of the first three months of 2021. In contrast, there was resilient export order growth at large firms. Manufacturers widely noted that new trading arrangements with EU clients had a severe impact on sales throughout the first quarter. Measured overall, small businesses recorded the steepest increase in input costs for a decade.

The planned easing of pandemic restrictions provided a boost to business optimism towards the year ahead outlook in March. Optimism among small firms was the strongest since this index began in July 2012, with growth expectations especially high in the construction sector amid a surge in demand for work on residential projects.