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ICAEW Business Confidence Monitor (BCM): Scotland

Q4 2021: Business confidence improves despite new challenges.

  • Business confidence stands at its highest level since the survey began.  
  • Both domestic sales and exports have recovered sharply, with growth expected to gain further impetus in the year ahead. 
  • Employment levels are also expected to pick up and, as the labour market recovers, businesses plan sharp rises in average total salaries.
  • Linked to this, the availability of non-management skills and staff turnover are growing challenges for Scottish businesses.
  • Transport problems are also more widespread in Scotland than elsewhere in the UK.
  • Input prices are projected to increase at the joint fastest rate across the UK, with businesses planning to feed these through to higher selling prices. 
  • Investment rates are expected to improve in the coming 12 months, reflecting the strong sales outlook and also mounting capacity constraints. 

Scotland’s Business Confidence Index stands at its highest level since the survey began in 2004, at +42.2. Sentiment is likely to have been buoyed by a recovery in sales over the past 12 months and expectations of more gains to come.

Domestic sales and exports growth

The sharp upturn in economic activity since the easing of most COVID-19 restrictions means that domestic sales are now up by 2.8%, year-on-year, in Q4 2021. Exports have expanded at the slightly slower pace of 1.3% over the last 12 months. Businesses expect growth to gather more momentum over the next year, with domestic sales forecast to rise by 5.6% in the year to Q4 2021. If achieved, this would be the joint fastest rate of growth since late 2008. The pace of export growth is projected to pick up to 4.4%, a stronger outlook than the UK average. 

Labour market

The rebound in activity over recent months has offset the declines in employment experienced during the latter stages of 2020 and early 2021. Indeed, employee numbers are now very marginally (0.2%) above their level from a year ago. And as the economic recovery continues to build, businesses plan to increase their staff levels at the much faster rate of 2.6% in the year ahead: the sharpest rise in three years. That is partly why companies also expect to increase average total salaries by 2.5%, following very limited gains during the pandemic.

Business challenges

Higher wage costs may also stem from difficulties relating to labour supply and recruitment. The proportion of businesses that cite the availability of non-management skills as a growing issue has surged to 37% in the year to Q4 2021, the highest rate in Scotland since the survey began. Even more widespread are staff turnover problems, with 43% of companies reporting this as an increasingly pressing issue.

Transport problems have also come to the fore as the Scottish economy recovers. In the year to Q4 2021, 44% of businesses view these as a growing challenge. This is nearly 10 percentage points above the previous record rate for Scottish companies.

Among other challenges, the tax burden has become a more widely reported growing challenge in Scotland (20%) than elsewhere in the UK. This is likely to reflect plans for higher corporation tax rates and an additional levy on companies’ National Insurance contributions, to cover care costs.

Input and selling prices

As well as rising labour costs, input prices are increasing for businesses at a faster rate than the UK average. This reflects rising demand both domestically and internationally, higher energy and commodity prices, disruptions to supply chains, and transport shortages. In the year ahead, Scottish businesses anticipate the joint fastest rise in input prices (along with Wales), at 3.5%. This would be the fastest increase in over a decade. Against this backdrop, there has been a pick-up in selling prices of 1.6% over the last year, and a stronger 3.0% rise is expected for the 12 months ahead.

Spare capacity and investment

There has been a rapid decline in the proportion of Scottish businesses operating below capacity, down from 65% at the end of 2020 to 46% in Q4 2021. This largely stems from the rebound in economic activity as the Scottish economy has reopened, although the withdrawal of some unused capital during the pandemic may also be a factor here. The fall in spare capacity is part of the reason why capital investment is set to increase by 2.5% over the next 12 months, following growth of 1.8% in the past year. And companies plan to upgrade their Research & Development (R&D) budgets, albeit at the more modest rate of 0.8%, after seeing a year-on-year contraction in Q4 2021.