The ICAEW recently published its Business Confidence Monitor (BCM): Scotland for Q1 2022, and the Royal Bank of Scotland (RBS) also released its PMI report for March 2022, both of which highlight that although Scottish Business activity and output is increasing, confidence is falling. Below we look at the findings in more detail and translate what this might mean for Scottish businesses.
The BCM reports that although business confidence in Scotland continues to be positive, it is beginning to fall back. It also suggests that Scottish businesses are less confident than elsewhere in the UK with both domestic and international sales levels lagging behind that of the UK average. This, coupled with rising input costs and challenges with recruitment, are all having an impact.
The RBS report, however, highlights a sharp rise in private sector activity, specifically within the service sector, tempered by a fall in manufacturing output.
Input costs continue to rise across the board in terms of fuel, material, energy and wages costs. Other factors influencing this are highlighted as ongoing shortages, as well as the invasion of Ukraine.
The knock-on effect is being seen in onward prices charged, and it is no surprise that Private sector businesses in Scotland are raising prices in line with higher input costs.
The view from Scotland?
The challenges that are currently being faced are nothing new when we examine the pattern from last year, and these are not going away in the short term. Employment rates are increasing, and sales growth is picking up, but this is now presenting different challenges in terms of staff turnover and the availability of skills to deliver.
This is, again, adding to wage inflation and impacting the overall input costs, and thus raising selling prices, with a further consequence of this being an increase in outstanding business, particularly in the service sector.
When compared with the rest of the UK, Scottish business is reporting a slower-paced increase in domestic sales and exports, which may be in part due to COVID restrictions continuing for longer in Scotland whilst being eased elsewhere.
Costs and prices continue to rise
Costs have once again increased in the quarter, with the main drivers continuing to be fuel, energy, materials and wages. The RBS report attributes these to contributing factors such as increased material and energy prices, continuing shortages, the ongoing effects of Brexit and the invasion of Ukraine.
It is clear that companies in Scotland are raising prices in response to this, and the increases are reported to be in line with the higher input costs. As a result, businesses have to be very active with their pricing to address the inflationary environment in which they operate. Both reports highlight the increase in input prices, and it is imperative that these are reflected in sales prices in order to protect margins.
Capital investment and capacity
The ICAEW report states that businesses intend to increase their capital expenditure investment in the next 12 months. This is likely to be in response to shortages of capacity and some of this increased spend may be accelerated as a result of current tax incentives to invest in plant and machinery in the coming year.
It is also encouraging to see that the proportion of business operating at under-capacity is decreasing, although this may be partially due to overall capacity being reduced during the pandemic.
An interesting challenge
All of the above presents a very interesting challenge - demand is growing and order books are filling up which make for good reading, there are however, difficulties in supply along with a shortage of labour and skills, resulting in a backlog of work.
It may be that this is an environment that will accelerate innovation in an attempt to address skills and labour shortages, or indeed to employ innovative ideas to lessen the effect of supply issues. It may also present an opportunity to focus on delivering goods and services to your best customers or clients, or at least a disincentive to chase bad business, as the resources that business do have need to be channelled in the right direction.
In conclusion
This is clearly a challenging situation to navigate, with demand apparently exceeding supply, difficulties with staff retention, skills shortages and rising costs all hitting at the same time. It remains key that businesses have their finger on their own pulse and that they stay up to date with what is happening both within and outside.
To that, the importance of up-to-date management information, both financial and non-financial, will be key to supporting informed decision making in a timely manner and to enable businesses to react quickly.
