SAGE DATA REVEALS RESILIENT SMES AMID WEAK ECONOMIC BACKDROP
Britain’s small and medium-sized enterprises are entering 2026 with stronger balance sheets but subdued appetite for expansion, as uncertainty in the global economy continues to weigh on hiring and investment decisions.
New data from Sage, based on a sample of more than 350,000 UK SMEs, suggests a period of what executives describe as “cautious momentum”. Revenues have risen and profitability has reached its highest level in four years, yet business owners remain reluctant to scale up operations in the absence of clearer economic signals.
The findings, published in the inaugural SME Pulse report, point to a divergence between financial performance and forward-looking confidence. While firms have succeeded in restoring margins through cost control and operational efficiency, many are prioritising resilience over growth.
Real revenues increased by 3.3 per cent year-on-year in 2025, outperforming wider UK economic growth of 1.0 per cent over the same period, according to official data. Profits rose by 6.2 per cent, marking the strongest performance since early 2022. The improvement reflects a sustained focus on cost discipline, automation and more efficient use of resources following a prolonged period of economic disruption.
However, investment remains constrained. Capital expenditure fell by 17.4 per cent over the year, extending a run of quarterly declines as firms delayed major spending commitments. Hiring has also stalled, with headcount rising by just 0.2 per cent in early 2026.
Steve Hare, chief executive of Sage, said the data captured a delicate phase in the recovery cycle.
“The message for 2026 is cautious momentum. Hiring is close to flat, but now is the time to rebuild productivity and resilience,” he said. “Businesses need to stay disciplined today while getting ready to grow tomorrow.”
He added that the trajectory for the year ahead would hinge on a combination of lower borrowing costs, easing labour market pressures and the effective deployment of artificial intelligence.
“The year ahead will depend on lower finance costs, easing labour pressures, and making the most of AI to improve productivity. The SMEs that protect cash flow while investing carefully in skills, retention and technology will be best placed for recovery.”
Despite modest stabilisation in domestic conditions—helped by lower interest rates and the absence of new tax measures in the Spring Statement—external volatility continues to complicate planning. Weak consumer demand and geopolitical uncertainty remain key constraints, reinforcing a defensive posture among smaller firms.
Labour market dynamics also reflect this caution. While median earnings rose by 5.3 per cent year-on-year, wage growth has slowed compared with the previous year. At the same time, productivity declined by 2.6 per cent in the final quarter of 2025, highlighting the challenge of translating cost control into sustained output gains.
The composition of the workforce is also shifting. Older workers now account for a growing share of SME employment, with over-65s representing 5.1 per cent of employees, up sharply from 1.8 per cent in 2022. In contrast, participation among younger workers has declined.
Regionally, performance varies. Wales recorded the fastest earnings growth, while London lagged behind on pay increases and experienced a slight contraction in headcount. Profit growth was strongest in the Midlands, reflecting a combination of industrial activity and cost advantages, while London continues to dominate in scale-up activity due to its access to capital and talent.
Sector trends point to structural changes across the economy. Utilities and health and social care are seeing expansion, driven by long-term demand factors such as the energy transition and an ageing population. Meanwhile, hospitality is undergoing consolidation as larger operators gain market share in a challenging cost environment.
The data underscores a central tension in the UK’s SME landscape: businesses are financially stronger but strategically cautious. For policymakers, the priority will be to convert resilience into growth by creating conditions that encourage investment.
Sage argues that targeted measures—including enhanced tax relief for digital and AI adoption, expanded skills programmes and simplified compliance for start-ups—could unlock further productivity gains. Without such support, the risk remains that SMEs will continue to prioritise stability over expansion, limiting their contribution to broader economic growth.
