Confidence among small businesses in the UK has returned to levels last seen before the EU referendum campaign began, according to the Federation of Small Businesses (FSB).

The FSB reports that, according to its Small Business Index, small companies that are optimistic about their prospects outnumbered pessimistic firms by 8.5 percentage points in the final three months of 2016. This is a return to the confidence levels recorded in the first quarter of last year, but some way off the peaks recorded in 2014 and 2015.

Mike Cherry, national chairman at the FSB, said: “We are delighted to see confidence bounce back at the end of 2016, effectively wiping out the fall we saw over the course of the year in the run-up to the EU referendum and its immediate fallout. The current economic outlook seems brighter, and UK small businesses are ambitious and want to make the most of it.”

There are one or two dark clouds on the horizon, however, according to the organisation’s analysis. The research found that profitability had dropped for the second consecutive quarter, while almost 40% of firms do not expect to grow over the next 12 months.

Regional variations of small business optimism

The study also found large regional variations in business confidence. Enterprises in London were far more negative than average: in the capital, firms with a pessimistic outlook outnumbered others by three percentage points.

This is in stark contrast to a year ago, when the index stood at +25. In Scotland, the picture is even more gloomy, with the confidence index standing at -29. Businesses in the North-East, the Midlands and Yorkshire currently report the highest levels of confidence.

The slide in the value of sterling is continuing to affect a large number of companies, with 28% saying that they were suffering from higher exchange rate costs at the end of last year, compared with just 5% of firms in the months leading up to June’s referendum.

Cherry added: “The falling pound is driving up the price of imports and rising oil prices are being reflected in higher fuel costs. These inflationary pressures and price competition are hitting the bottom line hard with the majority of small firms seeing their profits continue to fall.”

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