The new monthly index designed to monitor the performance of private sector enterprises with 1-49 employees showed that five times more of the UK’s small businesses reported growth in July (36%) than in April (7%).

At the same time, the number of small firms registering a decline in business activity was 28% in July, an improvement from 39% in June and down by more than half from the peak of 78% in April.

The headline All-Sector Small Business Activity Index – which monitors output at private sector companies with 1-49 employees – rose further in July from a record low in April, climbing to 53.3 from 42.5 in June. Being above 50.0, the index pointed to more small firms seeing an improvement in activity than a decline for the first time since February.

The latest reading signalled the fastest rate of growth for exactly two years. Nevertheless, the rebound was still slower than across the UK private sector as a whole (equivalent index at 57.1). This was largely confined to the service sector, where small businesses recorded a return to growth after four months of contraction but continued to see activity curbed by restrictions on capacity and a reluctance to spend among customers.

For manufacturers, the respective index registered 61.9, up from 49.8 in June and the first reading above the 50.0 no-change threshold since February.

The performance in July was better than that for the goods-producing sector as a whole (equivalent index at 59.3, up from 50.7 in June), with the rate of growth also outstripping those recorded by small construction and services firms.

Where an increase in production was recorded (at 41% of firms), this was often linked to rising inflows of new orders as customers resumed work and ramped up operations. Surveyed businesses also commented on a boost to productive capabilities as staff were recalled from furlough.

More good news for manufacturers came in the shape of employment figures. The decline in manufacturing employment slowed sharply in July. Overall workforce numbers were down only marginally and at the slowest rate since the current sequence of staff cuts began in March. This contrasted with another sharp rate of job losses among larger goods producers.

Among those small manufacturers that did report lower headcounts, this was often linked to redundancies amid under-utilised capacity. Several firms reported recalling staff from furlough, though there were still very few mentions of new positions being created.

Andrew Harrison, Head of Business Banking at NatWest said: “Seeing growth of activity in small businesses in the latest NatWest UK Small Business PMI is a positive sign of recovery, but overall, the data is still showing that smaller enterprises are lagging behind the activity seen among larger companies.

“Recognising this disparity, we want to be agile in our support to SME business customers as they face into the next period of uncertainty. We recently launched an initiative to enable customers to oversee, plan and protect their business with the integration of a market leading accountancy platform, FreeAgent, within our online digital banking platform. We have also supported our business customers with £7.1 billion approved under the Bounce Back Loan scheme.”

Stephen Blackman, NatWest Principal Economist, commented: “It’s welcome news that, like the economy overall, small businesses sentiment and activity improved sharply in July. We shouldn’t read too much into their slight relative under-performance. It’s likely a sectoral story. Small businesses tend to cluster within services and construction, sectors that recovered slightly slower than manufacturing. The gap should narrow, especially for construction and may have already done so.

“Longer term, the fortunes of small businesses rests on three powerful trends. First is the impact COVID-19 may exhort on our entrepreneurial drive. The second is whether the need for more collaboration between Government and big business crowds out opportunity for small businesses. The final trend is the extent that our attention and spending shifts to the local.”