The last quarter saw small businesses in the U.K. regain their confidence to pre-referendum levels but the falling pound is driving up costs and crimping profits, according to the Federation of Small Businesses (FSB).
The FSB's Small Business Index has now turned positive, with the headline confidence measure at +8.5 compared to -2.9 in the previous quarter. At the beginning of 2016, before the U.K. voted to leave the European Union, the headline confidence measure was +8.6.
"We are delighted to see confidence bounce back at the end of 2016, effectively wiping out the fall we saw over the course of the year in the run-up to the EU referendum and its immediate fallout," Mike Cherry, the FSB's national chairman, said in a statement on Wednesday.
"The current economic outlook seems brighter, and UK small businesses are ambitious and want to make the most of it," Cherry added. "Small exporters continue their strong rise, as UK goods and services become more competitive overseas and small businesses go out to find new markets and new customers."
The FSB added that while confidence was now positive and there were areas of "strong performance", profitability had fallen for the second consecutive quarter.
Furthermore, the FSB said that small business confidence in both London and Scotland remained in "negative territory", putting it out of kilter with the rest of the U.K.
"Despite the overall positive picture, our members still face many challenges as rising costs squeeze margins even further," Cherry said.
"The falling pound is driving up the price of imports and rising oil prices are being reflected in higher fuel costs," he added. "These inflationary pressures and price competition are hitting the bottom line hard with the majority of small firms seeing their profits continue to fall."