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Economic Insight

ICAEW Business Confidence Monitor (BCM): Scotland

Q1: Sentiment in Scotland rises above the UK average

The latest national Business Confidence Monitor (BCM) for Q1 2024 shows a significant improvement in sentiment compared to weak yet positive confidence in the previous quarter and the average for 2023. The index rose above its pre-pandemic average for the first time since Q1 2022, as economic prospects brightened.

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 15 January to 22 March 2024.

  • Confidence in Scotland rose significantly in Q1 2024 and is now marginally ahead of the UK average and higher than the historical norm for Scotland.
  • Export growth improved but Scottish businesses are less optimistic about future performance and expect domestic sales and exports to lag the national average in the coming year.
  • Input price inflation was lower in Scotland than any UK region and businesses anticipate that it will ease closer to its historical average. Wage growth also slowed but companies predict a similar rate of salary rises in the year ahead.
  • Selling prices are expected to continue to ease but Scottish businesses anticipate that they will raise them more than any other UK region or nation. Despite this, Scottish companies have the weakest profit growth expectations in the UK.
  • Regulatory requirements are the most widespread rising issue in Scotland and more prevalent than elsewhere. The tax burden is also a growing area of concern.
  • Scottish companies increased investment at a higher rate but plan the smallest rise over the next 12 months. R&D budget growth was lower than the national average in Scotland, a trend which is expected to continue in the year ahead.

Business confidence in Scotland

Business sentiment in Scotland increased in Q1 2024, with the Business Confidence Index reaching +15.4, up from +2.0 in the previous quarter and the highest it has been since Q3 2021. Scottish companies are slightly more optimistic about prospects than the national average (+14.4) and the historical average for Scotland (+5.0).

Domestic sales and exports growth

Annual domestic sales growth in Scotland fell slightly in Q1 2024 to 3.9%. This growth was still marginally ahead of the UK average growth rate and the Scottish historical average (3.0%). Companies in Scotland expect domestic sales growth to improve to 4.6% over the next 12 months, however this projection is less optimistic than the UK average (5.2%).  

There was an uplift in annual exports growth in Q1 2024 to 4.4%, compared to 3.0% in Q4 2023. This was significantly above historical average growth (3.0%) and puts companies in Scotland ahead of all regions except the East of England. The outlook for Scotland, however, is weaker than most other nations and regions in the UK, with businesses anticipating a marginal slowdown in export growth for the year to 3.8%.

Business challenges

The proportion of companies citing regulatory requirements as a growing challenge in Scotland dropped to 48% in Q1 2024 from 53% in Q4 2023. Despite the fall, the challenge remains the most widespread growing issue for Scottish companies and continues to be more prevalent than elsewhere in the UK. This may be reflective of the significance of the highly regulated Banking, Finance & Insurance and Energy, Water & Mining sectors to Scotland’s economy. Scottish businesses are also more concerned about the tax burden than other parts of the UK, with the proportion citing the issue rising to 33% in Q1 2024 from 26% in the previous quarter. While businesses pay the same rate of tax as in the rest of the UK, the increases to income tax in the Scottish Budget in December 2023 impacting higher earners in Scotland may worry some Scottish businesses, particularly those more dependent on consumer spending.

Concerns over competition in the marketplace have dropped significantly from the previous quarter, although it remains a growing issue for approximately a third of Scottish businesses.

Labour market

Scottish businesses raised their employment levels by 2.6% in the year to Q1 2024, over double the pace of the historical average (1.2%) and marginally ahead of the UK average (2.2%). Businesses anticipate growth will continue at this pace for the year ahead, faster than most other parts of the UK. Meanwhile, the availability of skills as a challenge, both management and non-management, continues to fade but the proportion of businesses citing staff turnover (24%) remains above the historical average (21%) in Q1 2024.

Input, selling prices and profits growth

While input price inflation has continued to fall across the UK to reach 4.7% in Q1 2024, Scotland has seen the slowest price growth of any UK region at 3.5%, a factor which is likely contributing to a significant increase in confidence. Prices are expected to continue to moderate to 3.0% over the next 12 months, bringing them closer toward, but still above the historical average (2.5%).

Salary growth in Scotland softened further in the year to Q1 2024, rising by 3.1%, although still high by historical standards (2.1%). Businesses anticipate wage pressures will ease slightly to 2.9% over the next 12 months as cost pressures continue to dissipate and will be considerably below the UK average (3.5%).

Scottish companies raised their selling prices more slowly than most other UK nations and regions, up 3.0% in the year to Q1 2024, but they recorded stronger profit growth of 4.0% compared to the UK average of 2.6%. Yet this favourable performance is not expected to be sustained with Scottish companies anticipating the weakest annual profit growth of any UK region in the year ahead.

Investment

Capital investment spending in Scotland increased by 3.8% in the year to Q1 2024, with Scottish companies increasing investment at a higher rate than anywhere else in the UK and ahead of the historical norm (2.1%). At a sector level, investment has been highest in Energy, Water & Mining, a sector that is well represented in Scotland and likely helps explain its stronger recent performance. However, Scottish businesses expect investment budgets will remain around similar levels, planning to increase investment growth by only 0.2%, which is the smallest planned rise in the UK. R&D budgets in Scotland rose by 1.3% in the year to Q1 2024 and businesses plan to increase them at a similar rate in the next 12 months, marginally behind the national average of 1.6% and much lower than the historical average of 2.1%.

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