RBS: Construction sector boosts fortunes for UK SMEs as lockdown measures ease
Scottish manufacturing and construction firms saw an encouraging boost in business throughout June as the coronavirus lockdown measures began to ease, according to the latest Royal Bank of Scotland UK Small Business PMI report.
The index is designed to monitor the performance of private sector enterprises with 1-49 employees and it pointed to a sustained rebound in business conditions in June from the record low seen during April.
June saw growth of activity across the UK construction sector as a gradual restart of work on site and adaptations to new regulations led to a boost in output. The increase was led by large firms, with the Small Business Activity Index registering 49.5 in June, up sharply from May’s 20.3, but below the total industry index of 55.3.
Anecdotal evidence suggested that work undertaken by small construction companies was disproportionately affected by material shortages and supply chain disruption due to the COVID-19 pandemic.
The headline Business Activity Index rebounded strongly in June, rising to 49.8 from 31.6 in May. Moreover, the latest reading pointed to a similarly encouraging trend to that seen across the UK manufacturing sector as a whole in June (equivalent index at 50.7, up from 35.0 in May).
Just over one-third of the survey panel (36%) registered an expansion of manufacturing output in June. In contrast, around 19% saw growth in May and only 12% reported a rise in April.
Small manufacturers mostly commented on a boost to production following a phased return to work after stoppages during the lockdown period.
Survey respondents also noted that the reopening of other parts of the economy, especially the construction sector, had helped to support customer demand.
At 42.5 in June, the headline All-Sector Small Business Activity Index, picked up from 26.3 in May and was further above the low seen in April (14.6).
However, the latest data has signified that the rebound has been more gradual among small enterprises. The equivalent All-Sector Business Activity Index for large UK companies was 51.3 in June.
A gap in performance relative to small firms was seen both in terms of current business activity and growth expectations for the next 12 months, with the shortfall centred on the service economy.
Small service providers faced particularly acute difficulties as parts of the economy reopened in June. Around 41% reported a drop in activity, while 23% signalled an expansion. This was an improvement on the situation seen in May, but it lagged behind the trend signalled by larger firms as many small enterprises remained only in the early stages of recovery.
Service sector companies commented on the challenge of adapting business facilities to meet social distancing needs and difficulties judging near-term workloads. Those in the travel, leisure and entertainment categories again reported widespread business closures.
Manufacturing had a relatively encouraging month in June, as did construction, despite severe supply chain disruption since the COVID-19 pandemic. Small firms in these sectors saw sharp rises in input costs. Manufacturers mainly reported higher prices due to exchange rate depreciation, while construction firms noted constrained availability of materials as sites reopened.
Finally, small firms indicated that persistently low workloads and fragile confidence meant that employment trends were highly subdued in June. There were some reports citing a return of essential employees from furlough, but the overall trend was a drop in staffing numbers for the fourth month in a row.
The gradual easing of lockdown measures helped to boost business activity across some parts of the service economy in June. This was highlighted by a rise in the Business Activity Index from 25.9 in May to 40.3 in June, which was the highest reading since the downturn began in March.
While the headline figure indicated steady progress for service providers after April’s record low, it fell far short of the equivalent reading for the sector as a whole (47.1 in June).
Small enterprises in the service sector often cited a knock-on impact from lower spending among their clients due to the COVID-19 pandemic, while those in the travel and leisure categories mostly noted ongoing closures or severely constrained business operations in June.
Sebastian Burnside, RBS chief economist, said: “The leap from 26.3 in May to 42.5 gives hope that the disappointing 1.8% increase in GDP in May has indeed accelerated. Those closer to the scene perhaps think so, as the share of firms actively trading approached nearly nine in ten in late June, up from eight in ten a month ago.
“Manufacturing and construction continue to lead the way, with close to 100% of firms back in business. But a sense of sobriety is needed. Over one in five firms (21.2%) have suffered a fall in output in excess of 50%, albeit this is a slight improvement from May. The dominant service sector continues to struggle, reflecting the slower easing of lockdown restrictions. Hopefully the shift to allow more retail and leisure activity in recent weeks will have boosted performance.
“In short, direction matters, and UK small businesses are slowly but surely recovering. But the path will be choppy and uneven. Companies remain understandably cautious. We’ve moved to a new world quickly and firms are having to learn and adapt at an astonishing pace.”