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Q1 2022: Business confidence, although still positive, has fallen considerably.

  • Scottish businesses are less confident than elsewhere in the UK. This may reflect more subdued domestic sales and export performance when compared to the UK average over the last year. Concerns over recruitment and rising costs are also likely explanations.
  • Companies expect sales growth to pick up, albeit at slower rates than forecast for the UK. Marketplace competition is a widespread concern.
  • Staff turnover and the availability of non-management skills are now more prominent challenges than at any time since the survey began for Scotland.
  • Linked to this, salaries are projected to see a near-record increase in the 12 months ahead.
  • Ongoing supply-side disruptions mean that input-price inflation has climbed above historical norms. Consequently, selling prices are rising sharply.
  • More encouraging is that businesses plan to markedly increase capital investment, reflecting emerging capacity constraints.

Scotland’s Business Confidence Index has fallen markedly from its Q4 2021 peak, and now stands at +16.3 in Q1 2022. This makes Scottish businesses, on balance, the least confident across the UK.

Domestic sales and exports growth, and marketplace competition

Weaker business sentiment may stem from modest sales performance when placed in the wider UK context. In the year to Q1 2022 domestic sales increased by 4.6%, compared to 5.3% for the UK. Weaker still was export growth, with sales rising by just 1.5% over the same period, a slower pace than the UK average (2.2%). Trading frictions due to Brexit may be a factor impeding growth here.

However, businesses expect that sales growth will pick up in the year ahead. Domestic sales and exports are forecast to rise by 5.5% and 3.7%, respectively. Even so, these growth projections still trail their UK counterparts. These muted sales growth expectations are associated with rising concerns over competition in the marketplace. At 32% in Q1 2022, this issue is growing more widely than anywhere else in the UK, with the exception of the North West.

Business challenges

As Scottish businesses navigate their way through the current phase of the pandemic, a number of business challenges are coming to the fore which were not widespread in the earlier stages of the crisis. For the first time since this BCM survey began, the availability of non-management skills and staff turnover are the most prominent growing challenges for companies. The former is a rising source of difficulty for 48% of businesses, while the latter is for 49%. These are the highest rates seen since the start of the survey in 2004. Regulatory requirements also remain a widespread issue, possibly related to COVID-19 restrictions, which in this quarter have tended to be tighter within Scotland than in much of the rest of the UK, and also perhaps difficulties in adapting to the new UK-EU trading arrangement.

Labour market

Concerns over staff turnover and skills shortages help to explain why wage bills are quickly returning to pre-pandemic rates of increase. In the 12 months to Q1 2022 average total salaries increased by 1.7%. And in the year ahead, businesses expect a further 2.6% rise in salaries. If this happens it will be the joint sharpest increase in eight years, and another factor affecting Scotland’s business confidence. Recruitment difficulties may also explain the slow rate of increase in employee numbers, up by just 1.4% over the last year. A considerably stronger 3.1% rise is expected for the year ahead, suggesting that employers expect current challenges to dissipate.

Input and selling prices, and profits growth

Business confidence is also possibly being hampered by increasing input costs. Input price inflation, year-on-year, stands at 2.8% in Q1 2022: a higher rate than the historical average for Scottish businesses. The same rate of increase is forecast for the coming 12 months. Businesses expect that they will be able to pass these higher costs on to customers. Selling prices are forecast to rise by 2.5% in the year to Q1 2023, a slightly faster pace than the UK average. These rising selling prices, combined with some sales improvements, should be sufficient to offset the impact of higher costs on profits growth, which are expected to be 5.1% higher in the year ahead.

Investment and spare capacity

It is encouraging that, despite the challenges, businesses intend to increase capital investment spending in the coming 12 months. After seeing a modest increase of 0.8% over the last year, spending on capital equipment is planned to rise by 2.4%. Capacity shortages are a probable explanation. Over recent quarters the proportion of businesses operating below capacity has been exhibiting a clear downwards trend, and has now fallen to its lowest rate since the second quarter of 2008. Research & Development (R&D) budgets are also expected to increase in the year ahead, albeit at the slower pace of 1.5%.