The latest national Business Confidence Monitor (BCM) for Q4 2023 shows a slight shift in sentiment within the quarter. However, the quarter-on-quarter improvement in sentiment is marginal, remaining broadly steady at a similar level over the last few quarters. Overall confidence continues to fall short of the pre-pandemic average.
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 17 October to 15 December 2023.
- The Business Confidence Index in Scotland fell in Q4 2023 and is now below the UK average and historical norm for Scotland.
- Domestic sales growth remained steady and outperformed most UK nations and regions. While export growth slowed markedly in Scotland, it also exceeded all regions except the West Midlands. Scottish businesses are the most optimistic about future export performance and expect to maintain the current rate of domestic sales growth.
- Input price inflation may have peaked in Scotland, though it is still close to the record high. A considerable slowdown is expected in the year ahead. Salaries are rising, with a similar rate of growth expected.
- Businesses continue to lift selling prices at the same rate as the previous quarter and, while they are expected to moderate, the predicted rate is higher in Scotland than elsewhere across the UK. Profits continue to grow and further improvements are anticipated.
- Competition in the marketplace is resurfacing as a major growing challenge, and the same is true for regulatory requirements. Indeed, the latter is the most widespread concern in Scotland and is more prevalent than elsewhere in the UK. Customer demand remains a pressing concern, albeit less so than before.
- Capital investment spending continues to rise, with further improvements expected in the next 12 months. Investment expectations are higher in Scotland than elsewhere in the UK, coupled with some of the strongest growth expectations for R&D budgets.
Business confidence in Scotland
Sentiment for Scotland fell in Q4 2023, with the Business Confidence Index now standing at +2.0, down from +6.4 in the previous quarter. Confidence is below the historical norm for Scotland and companies in Scotland are slightly less optimistic about prospects than the UK average.
Weaker sentiment in Scotland is consistent with broader economic performance. In October 2023, Scottish GDP fell by 0.5%, a deeper contraction than for the UK (-0.3%). Part of this is explained by the especially wet weather recorded in October 2023, as stated by the ONS, which businesses cited as a challenging factor.
Domestic sales and exports growth
Healthy domestic sales growth in Scotland is likely to have stopped confidence from falling further in the latest quarter. At an annual rate of 5.0% in Q4 2023, increases in domestic sales have been steady and favourable relative to most nations and regions in the UK. Companies in Scotland expect this rate of growth to be maintained in the coming 12 months, placing Scotland broadly in line with expectations for the UK average.
Export sales were up by 3.0% in Q4 2023 from a year ago. While it is markedly slower than in the previous quarter, the pace of increase tracks the historical average for Scotland and is faster than most other nations and regions in the UK. Encouragingly, businesses anticipate a more robust export performance in the year ahead, at 5.2% which is ahead of expectations elsewhere in the UK.
Business challenges
Companies in Scotland face several challenges, with some having become increasingly problematic in recent quarters. Competition in the marketplace appears to be resurfacing as a major growing issue; it is cited by 40% of Scottish businesses and is more prominent in Scotland than in any other nation and region. It is a similar story for regulatory requirements ‒ the proportion of businesses reporting it has trended upwards over recent quarters, and now stands at 53%, making it the most widespread rising issue for businesses in Scotland, and more prevalent than elsewhere in the UK.
While concerns over customer demand have eased in Q4 2023, it remains a pressing issue for around one in four Scottish businesses and is a significant issue elsewhere in the UK. In addition, labour market concerns have relented somewhat, with fewer businesses citing staff turnover and the availability of management skills as growing challenges, which have either typically broadly stabilised or started trending down towards the historical average in recent quarters. However, while this is also broadly the case for the availability of non-management skills, the proportion of businesses reporting it as a growing challenge, at 29%, remains high, with only companies in Yorkshire and the Humber seeing it as a more significant issue.
Labour market
Employment growth has eased over recent quarters and at 1.5%, year-on-year, in Q4 2023, it tracks the UK average and is above Scotland’s historical norm (1.1%). Businesses anticipate a pick-up in performance, to 2.6%, which would be the joint-fastest expected rate across the UK, alongside the East of England.
Labour costs continue to rise in Scotland and are still high by historical standards, with salaries rising by 4.2% in the year to Q4 2023. Companies anticipate growth to remain near the current rate over the next 12 months which, at 4%, is around twice the historical average. Only businesses in the East Midlands anticipate a faster uplift.
Input, selling prices and profits growth
Input price inflation may have peaked in Scotland, but while it has edged down from its record high in Q3 2023, it remains elevated by historical norms. At 5.4%, year-on-year in Q4 2023, the rate exceeds most nations and regions in the UK and is more than twice the historical average of 2.5%. Scottish businesses are optimistic that cost pressures will ease considerably over the coming year, with input prices expected to rise by 2.8% in the next 12 months ‒ slower than most nations and regions in the UK.
Companies in Scotland continued to raise their selling prices by 3.6% in the year to Q4 2023, remaining at a steady rate for the second consecutive quarter. This rate is anticipated to moderate over the coming year to 3.1%, though this is still more than double the historic average for Scotland and expectations are higher than elsewhere in the UK.
Rising selling prices, coupled with strong domestic sales, have helped profits grow by 3.3% in the year to Q4 2023. This is more favourable than the rate achieved for the UK as a whole (2.1%), and companies expect it to gain momentum, reaching 5.3% ‒ ahead of expectations in most parts of the UK.
Investment
Scottish businesses increased their capital investment spending by 2.3% in the year to Q4 2023, and investment is healthier than most UK nations and regions. Companies anticipate an uplift in the pace of increase, to 2.7%, over the coming year ‒ higher than elsewhere in the UK. Companies continue to raise their R&D budgets, which are now 2.7% higher in Q4 2023 than a year ago. And while it is expected to moderate to 2.0% in the next 12 months, at this rate, Scotland would remain one of the top-ranking nations and regions across the UK for R&D growth.
