Welsh SMEs show signs of recovery in new report

Economic Intelligence Wales released its annual report for 2025/26, revealing that Welsh small and medium-sized enterprises (SMEs) have made progress in securing financing but continue to face economic instability as their primary obstacle to expansion. The analysis, conducted by Cardiff Business School alongside partners such as the Development Bank of Wales and the Office for National Statistics, presents a cautiously optimistic outlook despite ongoing difficulties.

A newly formed Plaid Cymru-led Welsh Government has designated productivity growth as a key objective, with the goal of reducing the economic disparity between Wales and the rest of the UK by half over the next decade. The success of this initiative depends on SMEs, which are expected to lead the way through innovation and scaling operations. However, their ability to achieve this relies heavily on obtaining sufficient capital and maintaining stable economic conditions.

Adam Price, the Cabinet Minister for Enterprise, Connectivity and Energy, described the report as a sign of “cautious optimism.” He emphasized that improved access to financing and business ambition align with Wales’ need for increased investment. “Raising productivity means helping businesses invest in new products, skills and technology,” he said. “Ensuring that ambitious firms can access the capital they need to grow and innovate will be vital if we are to build a more prosperous and competitive Welsh economy.”

The data supports his perspective. Lenders reported increased credit availability across small, medium and large businesses in the first quarter of 2026. Gross lending to small firms increased by 51% in the first quarter of 2026 compared with the same period a year earlier, while 50% of UK SMEs reported using some form of external finance. Lenders also reported increasing demand for finance from smaller firms and improved credit availability across the market. Despite these improvements, the overall economic environment remains uneven.

Financing Progress Amid Lingering Economic Uncertainty

Global economic growth forecasts have been downgraded, inflation remains above target and businesses continue to face uncertainty around costs, recruitment and future demand. The Federation of Small Businesses’ confidence index remained firmly negative at -52.5, with economic conditions cited as the principal concern for SMEs. The report also notes that Wales saw more business closures than new business start-ups during the first quarter of 2026, while the value of Welsh exports fell by 0.5% to £19.1 billion in the year to March 2026.

Still, nearly 35% of Welsh businesses anticipate better performance in the coming year—a figure higher than the UK average—and the country’s GDP grew by 0.7% in the three months to April 2026. The report’s authors acknowledge these mixed signals. Professor Max Munday, one of the lead researchers, noted that while financing conditions are improving, business confidence remains fragile. “With productivity now central to Wales’ economic mission, ensuring SMEs can access the finance they need to invest, innovate and grow will be critical.”

Access to capital is not the sole concern. Many Welsh SMEs are squeezed between escalating costs and uncertain consumer demand, even as some press forward with growth initiatives. Giles Thorley, CEO of the Development Bank of Wales, stated that the report’s findings align with direct feedback from businesses: “Costs, recruitment and uncertainty continue to create real challenges, but many SMEs are still looking ahead and investing for the future.”

Productivity Push Hinges on Costs and Demand

The bank’s mission, as Thorley described it, is to provide viable businesses with appropriate financing at the right time, whether to endure short-term pressures or drive sustained expansion. While the report confirms that capital access is improving, the broader economic climate remains unstable. For SMEs, the critical question is whether the current lending momentum will lead to lasting growth or if deeper uncertainties will hinder progress.

One positive factor is the new government’s emphasis on productivity. If SMEs can obtain the necessary investment, the report suggests they could spur the innovation required to narrow the gap with other UK regions. However, progress will depend on more than financing alone. Steady cost management, clearer demand indicators, and a stronger labor market would enable businesses to take greater risks.

The report does not resolve these conflicting pressures, but it does reveal a fundamental reality: Welsh SMEs are adjusting to difficult conditions. The task for policymakers and financial institutions is to convert this cautious optimism into enduring progress.