The latest national Business Confidence Monitor (BCM) for Q3 2023 shows a small decline in business confidence in the quarter overall compared with Q2, although sentiment did rise during the quarter, possibly due to a growing likelihood that interest rates might be at, or close to, their peak. Confidence remains below its pre-pandemic average.
The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The latest quarterly findings are based on the period 26 June to 22 September 2023.
- The Business Confidence Index for Scotland remained steady in Q3 2023 and is now ahead of the UK average.
- Scottish businesses are more optimistic about future uplifts in domestic sales than most other regions or nations in the UK and they expect improvements in export growth in the coming year.
- Annual input price inflation and salary growth are at their highest since the survey began and are stronger in Scotland than elsewhere in the UK, with both expected to moderate over the next 12 months.
- Businesses in Scotland are raising their selling prices at the slowest rate across the UK and they are expected to continue to do so in the year ahead.
- Customer demand is growing considerably as a source of difficulty for Scottish businesses in Q3 2023 compared to the previous quarter. But regulations remain the most widespread challenge, and it is now more prevalent than elsewhere in the UK.
- Companies plan to raise their capital investment and R&D budgets faster than any other region or nation in the UK over the next year.
Business confidence in Scotland
The Business Confidence Index for Scotland remained at +6.4 in Q3 2023 for the second consecutive quarter. It is now ahead of the UK average for the latest quarter.
Domestic sales and exports growth
At 5.4% in Q3 2023, annual growth in domestic sales is high in Scotland, both in historical terms and when compared to the UK average. Scottish companies are more positive in terms of prospects than most other regions or nations and expect future growth to continue at around the current rate. Export growth has been healthy in Scotland, up by 4.7% year-on-year in Q3 2023 ‒ stronger than elsewhere in the UK, except the West Midlands. Businesses in Scotland expect faster rates of export increases in the year ahead (5.7%), only marginally behind the South East.
Business challenges
Concerns over customer demand have surged in Scotland, with 38% of companies citing it as a growing challenge in Q3 2023, up considerably from the previous quarter. Other issues that have become more problematic include access to capital, late payments and the availability of non-management skills. But regulations remain the most prevalent challenge, cited by 56% of businesses compared to 44% in the previous quarter, and it is more widely cited in Scotland than elsewhere in the UK. This may partly reflect the prominence of this concern in Banking, Finance & Insurance, a sector that is a key contributor to Scotland’s economy.
Labour market
Scottish businesses continued to raise their staff levels by 1.2% in the year to Q3 2023, broadly in line with the historical average but more slowly than elsewhere in the UK. The availability of non-management skills continues to be a prevalent issue, although a smaller proportion of businesses cite it as a growing challenge than they did a year ago. Companies are more optimistic about their hiring plans for next year, with projections reaching 3.9%, which is faster than anticipated in any other nation and region in the UK.
Input, selling prices and profits growth
Cost pressures continue to build for businesses in Scotland. Initially driven by high raw energy and commodity costs, inflation has come to be increasingly the result of more generalised wage and price rises across the economy. Input prices in Scotland are rising at the fastest rate, at 6.8%, marking a new record high for the nation; this is faster than any other region or nation in the UK. Businesses do, however, anticipate the rate to slow considerably in the year ahead, bringing it closer to, though still slightly ahead of, the historical norm.
Salary growth in Scotland is also at a record high of 5.0% in the year to Q3 2023, underpinned by rising employment and high inflation, and is growing faster than elsewhere in the UK. While businesses project the rate of increase to ease slightly in the year ahead, it will still be high by historical standards and notably ahead of the UK average.
However, businesses in Scotland are raising their selling prices at the slowest rate across the UK, at 3.6%. And as input price inflation weakens in the year ahead, so too will the pace of increase in selling prices, with businesses expecting a marked slowdown in the rate, to 1.7%. Indeed, businesses in Scotland anticipate lifting their selling prices more slowly than elsewhere in the UK.
Despite input costs and salaries rising at their fastest rate since the survey began, profits growth is running at 3.4% in the latest quarter, and businesses expect a similar performance in the year ahead.
Investment
Capital investment in Scotland rose by 2.9% in the year to Q3 2023, slightly faster than the UK average and the historical norm for the nation. However, weakness in business sentiment is likely to be holding back investment. Over the next 12 months, businesses anticipate a pick up in the rate of increase, to 3.7%, which if achieved will be higher than in any other UK region or nation. Scottish companies also raised their Research & Development (R&D) budgets, running at 1.8% in the latest quarter, and expect a marked improvement in the rate of growth in the coming year, reaching 2.9%, which is faster than elsewhere in the UK.
