The latest Business Confidence Monitor (BCM) shows business confidence falling further. Difficult economic conditions continue, though there has been some easing in the political turmoil of the previous period, which seriously unsettled financial markets. As a result, some economic stability has been restored, even though September’s events have resulted in higher interest rates, taxes and government borrowing, and lower government spending. But the global economic background continues to look very challenging.
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 interviewing is continuous, the latest findings are based on the period 17 October to 16 December 2022.
- The Business Confidence Index for Scotland remains in firmly negative territory. Only companies in Yorkshire & Humberside are less confident.
- Despite this, domestic sales growth has been healthy and is expected to moderate only slightly. Export growth is improving and the outlook for the next year is one of the strongest across the UK.
- Businesses, however, face a host of challenges. The availability of non-management skills and staff turnover continue to be among the most widespread growing challenges for companies.
- Access to capital and bank charges are also starting to come to the fore as growing challenges, reflecting the difficult conditions in financial markets.
- Given the labour market issues that companies face, average total salary growth is expected to outpace all other UK nations and regions in the year ahead.
- Businesses are also contending with the fastest increase in input costs since the start of the survey. In response, they are lifting their selling prices sharply.
- Driven partly by the weakening businesses confidence, plans for capital investment and Research & Development (R&D) are among the weakest across the UK.
Business confidence in Scotland
The Business Confidence Index for Scotland has declined for the fifth successive quarter, and now stands at -27.8. With the exception of Yorkshire & Humberside, this is the weakest reading across all of the UK, and the lowest recorded index score in Scotland since Q1 2009.
Domestic sales and exports growth
Despite the sharp decline in the Business Confidence Index, domestic sales growth remains comfortably above Scotland’s historical average. Annual growth in the latest survey period stands at 5.6%. Companies expect the rate of domestic sales growth to moderate slightly in the year ahead (to 4.8%), although this rise will still be nearly double the nation’s historical average.
In comparison, growth in exports has been slightly slower than domestic sales. However, growth here has markedly improved since the contractions suffered during the pandemic.
Business challenges
Businesses in Scotland face a wide range of challenges, and these are likely to be weighing heavily on company sentiment and contributing towards the decline in confidence. The availability of non-management skills and staff turnover continue to be among the most prominent growing challenges for businesses, with 40% citing the former and 44% the latter. Only businesses in Yorkshire & Humberside are more challenged by staff turnover issues.
Regulatory requirements are also now back among the most widespread challenges for companies. In the latest survey results, 41% of businesses report these as a growing source of difficulty, the highest rate across all of the UK. This may partly reflect the prominence of this challenge in Banking, Finance & Insurance, a sector that is among the most highly regulated in the UK, and that has a significant presence in Scotland’s economy.
One other rising challenge that is increasing greatly in significance is access to capital. Strikingly, 24% of companies now cite this as a rising problem, the highest proportion in Scotland since Q4 2012. Only in London is this issue more widespread. Clearly, uncertainty in domestic financial markets and the recent rises in interest rates are factors behind this. In addition, 21% of companies in Scotland report bank charges as a growing challenge, making it a more prominent issue than it has been since Q3 2011.
Labour market
Ongoing challenges with the availability of non-management skills and staff turnover, as well as high inflation rates, help to explain why average total salaries are expected to rise at the fastest pace across all UK nations and regions in the year ahead. After rising by 3.7%, year-on-year, in the latest survey period, salaries are expected to be a further 4.4% higher in the next year. Difficulties surrounding recruitment and the retention of labour may underpin the modest employment outlook that businesses in Scotland have, as well as their lack of overall business confidence. Companies anticipate only a 1.1% rise in employee numbers over the next year, the joint slowest outlook across the UK along with the West Midlands.
Input and selling prices, and profits growth
Businesses continue to navigate through a very difficult cost environment. Against a backdrop of continued supply-chain disruptions and elevated energy and commodity prices due to the Ukraine-Russia war, annual input price inflation is running at its fastest rate (6.0%) since the start of the survey in 2004. However, businesses do expect this pace to moderate in the 12 months ahead, to 3.7%, they are possibly expecting current supply-side issues to gradually unwind and commodity prices to ease back to more familiar territory.
To help offset these input cost pressures, selling prices charged to customers have been lifted sharply. An increase of 3.2% in the latest survey period is more than double Scotland’s historical average. And a similar increase of 3.1% is expected over the coming year.
Despite the fact that businesses are contending with higher costs, the combined effect of higher sales and selling prices means that profits are still rising (up 4.2% on a year earlier), albeit at a slower pace when compared to this time last year. Profits growth is also expected to moderate further in the 12 months ahead, to 3.7%, with the expected slowing of domestic sales growth a possible factor behind this.
Investment
With increasing uncertainty and slowing profits growth, investment rates among businesses in Scotland are particularly subdued. In the latest survey period, companies increased capital investment spending by just 1.7%, the weakest outturn across all UK nations and regions. A rise of just 0.2% is planned for the next 12 months, with only companies in the East Midlands having weaker intentions here. In terms of R&D budgets, annual spending increased by just 1.0% in the most recent survey. This, again, was the slowest rise across the UK. The same rate of increase is expected over the coming year. Only companies in the East Midlands have weaker plans. This modest outlook for all forms of investment spending is very concerning, given their importance to the future productivity gains and competitiveness of Scotland’s businesses in both domestic and global markets.