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ICAEW Business Confidence Monitor (BCM): Scotland

Q3 2021: Business confidence firmly in positive territory but slightly below UK average.

  • The Business Confidence Index is very high by historical standards, although Scottish businesses are slightly less optimistic than the UK average. 
  • Both domestic sales and exports are expected to rebound sharply in the year ahead but are expected to trail their respective UK averages. 
  • Businesses plan to start hiring again and anticipate a pick-up in total salary growth.
  • Linked to this, staff turnover and skill availability are becoming more widespread growing challenges.
  • Input prices are rising for businesses, although at rates similar to pre-pandemic norms.
  • Regulatory requirements are a growing concern, while worries over customer demand have eased compared to recent quarters.
  • Businesses plan to raise capital investment in the year ahead, reflecting the stronger sales outlook and growing capacity constraints. 

Following a challenging past year, Scotland’s Business Confidence Index is in firmly positive territory, standing at +34.6 in Q3 2021. Sentiment is likely to have been buoyed by the gradual reopening of the Scottish economy over recent months and the quick distribution of coronavirus vaccines. That said, when placed in the context of the UK, Scottish businesses are slightly more subdued than elsewhere. 

Domestic sales and exports growth 

The rise in business confidence is clearly related to expectations of a strong upturn in sales growth over the year ahead. Although domestic sales are still 0.9% lower than they were a year ago, companies anticipate a rebound of 6.8% over the next 12 months. If achieved, this would be the fastest rate of expansion in domestic sales since the survey began in 2004. And export sales, which are currently running at a marginally lower level (-0.4%) than the previous year, are also forecast to see a strong boost in the year ahead, although by a more modest 3.3%. However, these growth projections trail their respective UK averages, which probably explains why the Confidence Index is also slightly more subdued than forthe UK.

Labour market

During the pandemic, declines in employment have been relatively modest compared to contractions in output. This largely reflects the role of the government’s Coronavirus Job Retention Scheme, which has cushioned the hit to the labour market. And as economic conditions begin to normalise in Scotland, businesses plan to start hiring again. Indeed, employee numbers are expected to rise by 3.0% in the coming 12 months, in line with the UK outlook. As employment rises, companies also anticipate an increase in average total salaries of 2.0%. This is similar to the increases seen during 2019, just before the pandemic struck.

Business challenges

Higher wage costs are also consistent with evidence of increasing problems with skill availability. The proportions of businesses citing the availability of management and non-management skills as growing challenges compared to 12 months ago stand at 24% and 23%, respectively. These are markedly higher rates than seen in recent quarters. Staff turnover has also become a much more widespread growing concern, with 26% of companies now reporting this. Among other challenges, the proportion of companies reporting regulatory requirements as a growing source of difficulty has also exhibited an upward trend in recent quarters, and now stands at 45%, a rate that compares unfavourably with the UK average of 40%. This could relate to the difficulties that some companies have had in adjusting to COVID-related restrictions. In addition, new custom changes post-Brexit could be hampering the operations of businesses.

On a more positive note, the percentage of companies that see customer demand as a growing challenge has eased sharply from its heights during the pandemic. 30% of businesses now report this, a lower rate than for the UK as a whole.

Input and selling prices

Rising wage costs are also being paralleled by increases in input prices. Over the last 12 months input price inflation picked up to 0.9%. Companies expect this to continue, with another 1.5% in the year to Q3 2022. However, this would simply be a return to pre-pandemic norms. And while businesses were largely unable to let input cost rises feed through to selling prices during the pandemic, they expect selling prices in the year ahead to rise by 1.3%. Again, this is broadly in line with the increases seen before the pandemic.

Spare capacity and investment

There has also been a rapid decline in the proportion of Scottish businesses operating below capacity. This is down from 65% at the end of 2020 to 44% in Q3 2021. This mainly reflects the rebound in economic activity as the Scottish economy has reopened, although it may also relate to a possible withdrawal of some unused capacity during the pandemic.

This decline in spare capacity is likely to be part of the reason why businesses plan to increase capital investment by 3.0%, following a modest 1.3% rise in the year to Q3 2021. Research & Development (R&D) budgets are also expected to rise, albeit at the more modest rate of 1.3%. And as businesses start increasing their headcounts again, staff development budgets are set to increase by 3.3%, after barely changing over the past year.