UK small and medium-sized enterprises (SMEs) have seen business activity expectations improve for the second month running in March, driven by the highest levels of optimism seen since October 2024, according to figures from the NatWest UK Business Growth Tracker.

NatWest’s data shows that mid-market businesses in particular continued to outperform the wider UK economy last month, as business activity rose for the sixteenth month in a row, with the Purchasing Managers’ Index, which provides an overview of business performance and sentiment across the UK, picking up from 53.1 in February to 54.7 in March.

According to the Tracker, this upturn in business activity among mid-market firms was driven by stronger performance in the service sector, which registered the fastest increase in output for six months.

However, while the private sector as a whole recorded marginal growth in the first quarter of 2025, UK SMEs saw a modest decline in output levels.

The NatWest UK SME Business Activity Index registered 48.2 in March, below the 50.0 threshold that separates growth from contraction for the fourth month running, however, the index was up from 46.8 in February, making March’s output data the slowest pace of decline recorded so far this year.

NatWest’s tracker also found that UK businesses’ experiences varied depending on their size, sector and location, with construction companies recording the fastest downturn in business activity (index at 42.5), followed by manufacturers (44.5), while the service sector showed the most resilience (49.5). 

Across the mid-market, the services economy was likewise the bright spot (index at 56.3), having recorded its quickest increase in output for seven months, while mid-market manufacturers signalled the steepest downturn in production in over a year (46.3).

Meanwhile, a combination of subdued demand and strong cost inflation continued to exert pressure on operating margins at SMEs over March. 

The latest rise in average cost burdens was the fastest since April 2023, with survey respondents widely commenting on rising salary payments and efforts by suppliers to pass on higher payroll costs. 

Several monitored companies also mentioned reducing their staffing levels and adopting recruitment freezes to keep a lid on spiralling costs, which had been pushed up due to greater payroll expenses, with SMEs experiencing a more muted pace of job cuts over March, reflecting efforts to retain skilled staff and focus on long-term business expansion objectives.

The Tracker data also indicated that average operating expenses faced by mid-market companies continued to rise sharply during March despite the rate of inflation moderating to a five-month low, with new orders received by mid-market companies rose again in March, stretching the current period of expansion to seventeen months.

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“Mid-market businesses continue to play a leading role in driving economic growth, as seen in the improvement in business output and new orders recorded in March’s data,” said Sebastian Burnside, NatWest’s chief economist.

“However, SMEs have found the first quarter of the year more challenging, with subdued demand conditions and rising costs continuing to exert pressure on their margins.

“Businesses remained positive about the outlook for the year ahead in March. But as we’ve seen in the last few weeks, market conditions can change rapidly and recent tariff announcements suggest we could see continued uncertainty in the coming months.”