Small businesses under severe pressure amid rising costs and inflation

Micro businesses with fewer than 10 employees are increasingly concerned about their future as they face mounting cost pressures and persistently high inflation, according to the latest Capital 500, London’s Quarterly Economic Survey conducted by the London Chamber of Commerce and Industry (LCCI).

Only 25% of London businesses believe the UK economy will improve over the next 12 months, down from 31% in Q4 2024. Similarly, just 28% expect an improvement in London’s economy.

Particularly striking is the decline in confidence among micro businesses: the balance of firms expecting economic improvement in London’s economy has fallen sharply from -1 in Q4 2024 to -10 in Q1 2025 – a steeper drop than seen among larger firms.

Firms are also continuing to grapple with high operating costs. 63% of businesses of all sizes reported an increase in their energy costs in Q1 2025, with 51% reporting a similar increase in fuel costs. Smaller businesses are also facing significant pressure in the costs of accessing new skilled workers. Just 1 in 4 – 24% – of micro businesses expected to hire in the next quarter, when compared with nearly half – 47% – of larger businesses (10 or more employees).

Concerns over inflation remain high, with 57% of businesses citing it as more of a concern than it was three months ago, unchanged from the previous quarter. Meanwhile, domestic and export demand has remained largely flat across the board, reflecting a general stagnation in business activity.

Karim Fatehi OBE, Chief Executive of the London Chamber of Commerce and Industry (LCCI) said, “Businesses across all sectors and sizes are navigating a tough economic environment shaped by global instability in light of new US tariffs and recent tax increases.

“These findings highlight that micro businesses – who make up 99% of the UK’s business population and employ millions – are facing particularly acute challenges in terms of hiring, inflation, and long-term confidence.

“Most concerning is the steep decline in optimism among small firms in the UK’s economic prospects, now at its lowest point since 2022.

“The upcoming Spending Review must offer real, targeted support. The government must actively engage with small businesses to ensure their resilience and growth. Their ability to invest, hire, and train is critical to the UK’s wider economic success. London remains the engine room of the UK economy- what’s good for London is good for national growth.”