British SMEs put faith in domestic-led recovery as fall in exports remains

London - 23 April 2014

  • Majority of UK SMEs expect improvement in business environment in 2014 
  • Q1 exports to non-European markets fail to regain momentum lost in Q4 2013 
  • SMEs still plagued by worries over health of the global economy, the Eurozone and currency volatility 

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

The report found that British SMEs are witnessing a domestic-led recovery, with export activity outside of Europe failing to recover from the decline seen in the second half of 2013. This decline was particularly pronounced in the final quarter of the year, when SME exports fell significantly and unexpectedly to all major markets. Export levels have remained subdued in the first quarter of 2014.

Europe was the only region to see a recovery in UK exports:

  • 76 per cent of SMEs claim customers on the continent, a rise of 10 per cent from the previous quarter and a return to levels seen a year ago.
  • 40 per cent of SMEs expect their trade with the Eurozone to rise in the next six months – the highest proportion ever recorded. 
  • Imports from Europe hit a new low, with only 57 per cent of SMEs indicating they buy from the UK’s largest trade partner, compared to 59 per cent last quarter and 74 per cent in Q1 2013.

Despite the improved balance of trade with Europe, UK SMEs continue to feel the effects of a sustained period of pound appreciation against major currencies. Sterling has appreciated by eight per cent[1] since Governor Carney came into office, and the Bank of England continues to voice concerns over the strength of the pound potentially harming exports. The latest ITM revealed that:

  • Only nine per cent of SMEs have customers in China compared to 15 per cent a year ago, whilst six per cent sell to India vs. 14 per cent in Q1 2013.
  • 17 per cent of SMEs sell to other Asian markets, a fall of ten percentage points over Q1 2013.
  • SMEs exporting to North America fell 11 points in the same period to 22 per cent.
  • 11 per cent of SMEs have customers in Africa and ten per cent in Australasia, compared to 18 per cent for both markets in Q1 2013.
  • Only three per cent of SMEs export to Brazil and five per cent to other South American markets, compared to nine per cent and 12 per cent a year ago.

The domestic picture fared better, with SME confidence in the health of the UK economy consistently rising each quarter since Q1 2013:

  • Over half of SMEs (57 per cent) think the British economy has improved in the last six months compared to only nine per cent at this time a year ago, with 90 per cent of these believing the improvement to be sustainable.
  • The number of SMEs confident in the overall UK economy was up five percentage points to a record 82 per cent, with 37 per cent intending to recruit additional staff this year.

Christina Hamilton, UK Managing Director of Western Union Business Solutions, headquartered in London, said: "These results are an important confirmation of the domestic recovery and are a welcome sign that improving economic conditions are beginning to extend from big corporations to SMEs.

“Whilst improving domestic and European demand is welcome, there is a danger that the economic recovery will remain unbalanced. The risk is that businesses will return to old habits and rely too much on local customers at the expense of exporting to high-growth markets.

“This research confirms the concerns of the Bank of England over sterling appreciation. UK companies have been forced to adapt to a constantly changing economic landscape, with a strong pound fuelling pressure on exports. Not only does sterling strength hurt the international competitiveness of UK SMEs, but continued pound appreciation also has the potential to derail hopes of a more export-led recovery.”

Top Five SME concerns:

The health of the global economy is the main source of worry for SMEs, with 72 per cent listing it as a top concern. The remaining four are:

  • Cheaper competitors (63%);
  • Customer loss (57%);
  • Currency volatility (54%);
  • Eurozone instability (52%).

Despite the high level of concern about currency volatility, nearly half (45 per cent) of SMEs engaged in cross-border trade do not use any risk management solutions to help protect against foreign exchange risk.

Hamilton continued: “67 per cent of SMEs believe that the Eurozone crisis is not yet over and a further 13 per cent say that the worst is yet to come. This just reinforces the need for a balanced and sustainable export-led recovery to fuel the British economy and ensure we move firmly beyond the economic downtown of the last six years.

“Small business owners have learned the lessons of the financial crisis and remain on high alert to tremors in the global market. It is extremely worrying that nearly half of UK SMEs take no steps to protect their businesses from fluctuating exchange rates, which translates to a loss of control over pricing and uncertain budgets. This ‘SME inertia’ results from a lack of understanding and awareness over foreign exchange hedging, which is often seen as complex, expensive, or even risky. More must be done to educate these businesses about how simple it is to control their exposures to global markets.

“SMEs continue to walk a tightrope back to full economic recovery in the face of a strengthening pound and cheaper international competitors.”

 

[1] Bloomberg: 'Carney Proving Favored Banker in Sterling’s Revival: Currencies'

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