Business funder Bibby Financial Services (BFS) has found that only 36% of UK SMEs expect to grow in the first quarter of 2016, as a muted outlook takes hold amongst the nation’s smaller businesses.

BFS’ latest SME Confidence Tracker shows that growth expectations fell by 10 percentage points from Quarter 3 to Quarter 4 2015, while 17% of small businesses surveyed expect sales to decline in the first three months of the year.

Of all parts of the UK, Scotland appears worst hit with only 29% of Scottish business owners and decision-makers expecting sales to increase, compared to the national average of 36%.

David Postings, global chief executive of Bibby Financial Services, said: “Recent ONS data shows growth in the UK economy slowed in 2015, with third quarter growth cut from 0.5% to 0.4%. Our latest SME Confidence Tracker reflects this dampened outlook amongst the country’s small businesses.”

The Tracker for Quarter 4 2015 indicates that SMEs will enter 2016 with muted investment plans, with 35% saying that they do not intend to invest over the next three months.

Top of the list of reasons for holding off on future investment is the uncertain economic environment in the UK. Almost a third (29%) of small business owners and decision-makers cite this as a barrier to capex, up from 21% in Quarter 3.

Postings said: “SME confidence is plummeting, while investment is only being made if it is essential. Concerns over the uncertain UK economic environment are strengthening, suggesting that SMEs believe the recovery is losing steam.”

Where businesses are planning to invest over the next quarter, their reasons for investment are focused on maintaining ‘business as usual’ activities, such as replacing outdated equipment and keeping ahead of competitors.

Despite investment in existing and new staff topping the list of planned investments, only one in 10 SMEs say that “ensuring the business attracts and retains the best talent” is a primary reason to invest.

“The Q4 Tracker presents a gloomier outlook than seen before,” added Postings. “While in Quarter 3, small business owners were sensing dark clouds on the horizon, they now appear to be preparing for the storm.

“Government and policymakers would be wise to heed the reality of SME experiences and hold off on any major changes to monetary policy. Small businesses need certainty in the UK economy and as much ‘forward guidance’ as possible, if they are to lift themselves out of this downward spiral.”