Despite stable economic conditions, there has been a sharp fall in confidence among small businesses because of concerns about Brexit.
The Q3 SME Health Check Index, published by banking group CYBG in partnership with the Centre for Economics and Business Research (Cebr), has found that while the UK economy has gained momentum, there has been a sharp drop in SME confidence.
The study shoes that the UK economy has grown by 0.6%, the fastest rate of quarterly growth rate since 2016. Four out of eight performance indicators show improvement - capacity, employment, gross domestic product and net business creation; the Index score for lending remained unchanged.
However, SME confidence has fallen sharply by 23 points to 34 ‐ the third lowest ever recorded. Of the other research indicators, business costs and revenue have also worsened. It means that the Q3 Health Check Index is at its second lowest level since data collection began in 2014.
Six UK regions saw their SME Health Check Index score decline in Q3, largely because of business cost inflation and weakening confidence. Yorkshire and the Humber recorded the largest fall, following three consecutive quarters of improvement.
Bucking the trend, the North West of England saw its Index score rising by 13 points to 37. In comparison, London dipped by three points to the joint lowest it has seen since the Index began.
Gavin Opperman, group customer banking director at CYBG, said: "At a macro‐economic level, the UK appears to be faring well. Sectors which have previously struggled, such as construction and manufacturing, have shown marked improvement and the share of SMEs operating below capacity has also dropped. Framing this is relatively strong GDP growth, particularly impressive given other major economies have slowed.
"Given this seemingly positive backdrop, it would be reasonable to expect this quarter's Health Check Index to reflect a more optimistic SME market, however the political and economic uncertainty driven by Brexit has sowed seeds of doubt and businesses have made it clear that they are unsure about what 2019 holds for them."
The report has also examined the potential impact of Brexit on the UK's nations and regions, identifying which parts of the country are most at risk of disruption caused by Brexit. The findings show that Wales and Scotland are most vulnerable, followed by the West Midlands, the North East, the East of England and the North West.