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Rise in hiring heightens surge in SME confidence but fall in exports raises warning

• SME confidence in the UK economy improves for fifth consecutive quarter

• Over one third of SMEs plan to recruit more staff

• Export activity drops as sterling rises

The Western Union Company (NYSE: WU), a leader in global payment services, today announced the latest findings from the Western Union Business Solutions International Trade Monitor (ITM), the quarterly economic confidence survey of over 650 UK small and medium-sized businesses engaged in international trade.

British SME confidence grew in the final quarter of 2013 with over 77 per cent of SMEs expressing optimism in the UK economy. This figure represents the fifth consecutive quarterly rise and the highest number yet recorded.

In the period October – December 2013, the International Trade Monitor found:

• Confidence grew 9 percentage points on Q3 2013 and 25 points on the final quarter of 2012;
• Over one third of SMEs (36 per cent) indicated that they plan to recruit more staff in 2014;
• 59 per cent will keep staff levels steady, whilst only 5 per cent have plans to reduce headcount;
• Half of SMEs (47 per cent) believe the health of the economy has improved in the last six months, the third consecutive quarter in which sentiment has strengthened significantly;
• Of those that see an upturn in business, the overwhelming majority (90 per cent) believes that it is sustainable;
• Manufacturing SMEs are more optimistic about the future than their retail counterparts; 55 per cent expect the general business environment in the UK will continue to improve in 2014 compared to 45 per cent of those in the retail sector.

SME confidence in the return to growth was tempered by a significant increase in concerns about customer and order loss, credit availability and political influence:

• Worries about customer loss rose 11 percentage points on the previous quarter, with 60 per cent of SMEs naming it a top concern;
• Anxiety about credit availability rose 10 percentage points from Q3;
• Credit concerns were closely followed by increased worries about political influence (+9 points), the efficiency of international payments (+9 points) and cash flow (+6 points).

Kerry Agiasotis, Global Managing Director, Western Union Business Solutions, said: “SME confidence in the UK recovery remains on track. 2013 ended with a string of positive economic data; what we are seeing now is faith in the strength of the British economy translating into action as more small and medium-sized businesses look to increase investment in their companies.”

Strong international expectations complicated by fall in exports

SME confidence in international trade conditions climbed to 82 per cent, up from 68 per cent a year ago and the highest number on record. This positivity, however, was dampened by a fall in trade with major export destinations, deepening a trend seen earlier in the year. The overall drop in export activity over the second half of 2013 corresponds with a rise of nearly 9 per cent in the value of the pound vs. the USD, indicating that sterling strength could be damaging SMEs’ international prospects.

In Q4 2013:

• SMEs selling to China declined from 14 per cent in Q3 to 9 per cent whilst those with clients in India dropped from 11 per cent to 6 per cent;
• Exports to the rest of the Asian continent fell more steeply, from 25 per cent to 14 per cent;
• SMEs with customers in Europe dropped from 74 per cent to 66 per cent, whilst those selling to North America fell to 21 per cent compared to 33 per cent – the lowest number on record. The fall correlates with the US Government shutdown, which may have temporarily limited demand from American buyers.

Kerry Agiasotis continued: “Despite the positive outlook for international trade, global market worries and currency volatility dampened SME export activity in Q3 and Q4. The competiveness of British goods is not what it was 12 months ago; this was demonstrated by the dip in trade with all major export locations and serves as a stark wakeup call about the difficult conditions many small and medium-sized businesses still face.

“The process of normalising monetary policy in some countries, notably the United States, and the resultant volatility will be a big challenge for many SMEs in 2014. We saw in Q3 how vulnerable they can be to reverse capital flows and unexpected currency movements; this trend has only strengthened in the last quarter and has now been compounded by the overall rise in sterling.”

Credit and working capital

SMEs had a lukewarm response to the Government’s Funding for Lending Scheme; half of SMEs surveyed (48 per cent) had heard of the programme, but only 28 per cent believe it will help them gain access to credit. The majority (62 per cent) said it would make no difference whilst only 21 per cent of respondents said they would be likely to take advantage of the finance solutions provided by the British Business Bank.

Over one third of SMEs (36 per cent), however, thought credit easier to obtain now than 12 months ago, an increase of 20 percentage points from Q4 2012. In addition, a small but significant number of SMEs (17 per cent, up from 12 per cent in Q3) said they were likely to renew or request lines of credit, another indication that they are looking to invest more in their businesses.

“Uncertainty of demand remains a very real obstacle to growth; SMEs need sustainable cash flow and required working capital to be competitive. Many companies are feeling pressure because whilst healthy, they may not have the strongest balance sheets, making them less attractive as traditional loan candidates. Working capital and supply chain finance schemes could go a long way towards improving SME access to funding,” Agiasotis said.