We have recently seen the publication of the ICAEW Business Confidence Monitor (BCM): Scotland for Q1 2023 and the Royal Bank of Scotland (RBS) Scotland PMI for April 2023, both of which highlight that while business confidence in Scotland is increasing, it is lagging much of the rest of the UK and continues to remain in negative territory.
Business confidence in Scotland
The BCM report indicates that although business confidence in Scotland rose significantly in quarter one, this follows a very low level in December 2022 and remains behind almost all other UK regions, with Scotland having lagged behind the UK average since the beginning of 2022.
What is unusual, however, is that despite the confidence being low, domestic sales showed the strongest increase in the UK in the first quarter of 2023, with customer demand reported as a challenge by only 25% of Scottish businesses.
Export growth shows a different picture, with this falling behind the UK average, albeit in April we saw the quickest improvement in the previous ten months.
Scottish businesses are experiencing challenges on multiple fronts, with issues persisting in the labour market, the regulatory environment and the availability of capital. In addition, there continues to be a challenge in the labour market around a shortage of non-management skills and staff turnover - which are reported as issues by over a third of Scottish businesses.
A higher proportion of businesses in Scotland than the UK average list regulatory difficulties as a key issue, which may partly be a result of the significance of banking, finance and insurance to the Scottish Market. There are also some very high-profile regulatory matters on the horizon, including the Deposit Return Scheme (DRS), changes in the short-term let market and potential restrictions around alcohol advertising that are feeding into this sentiment.
Furthermore, there are challenges around access to capital, as a result of increases in interest rates and uncertainty in domestic financial markets, along with an increasing tax burden.
Input, selling and profit growth
As with 2022, there are still issues surrounding inflationary pressures on business across the UK, with the ongoing upward pressure on prices as a result of the Ukraine-Russia War. It does appear that there is some confidence the inflationary pressure will reduce in the coming months – although the latest figures have remained unchanged (May 2023). This is having a direct impact on selling prices, which are also seeing sharp increases.
With selling prices and sales both growing, profits continue to rise, being 6.5% up on the previous year, however, there is little confidence that this will continue with an anticipated slowdown in domestic sales growth and weaker selling price rises.
RBS PMI
The RBS PMI report shows a similar picture, with new business rising in Scotland as it has across the whole of the UK, albeit slightly behind the average rate of the UK as a whole. Optimism is similarly muted compared to the rest of the UK, with the exception of the North East of England.
In respect of business capacity, the pace of job creation quickened in Scotland in March and April which is ahead of the rest of the UK, though this is likely a result of a slower pace in previous months.
Outstanding business in Scotland rose in April for the first time in ten months, which has been driven by growing business and recruitment difficulties.
While input cost inflation eased across the entire UK in April, it still remains high. Scotland is, however, experiencing this cost burden at a higher level than the rest of the UK, and this continues to be reflected in increased selling prices albeit these are slowing down across the UK.
What does this all mean?
Both reports confirm similar trends, with inflationary pressures continuing, although slowing down. Whilst Scottish businesses are experiencing sharply increasing input prices, and therefore selling prices, these look to be at a slower rate than across the UK as a whole.
Although December and January saw a small decline in employment in Scotland, by April there was a rise in workforce numbers with a three-month upward trend. This may be an indicator that Scotland’s indices are running behind those of the rest of the UK.
It is clear that Scottish Business is more cautious about what comes next, although overall confidence is increasing.
Concerns from the food and drink sector over the DRS have by now come to fruition with the implementation being delayed until October 2025 to coincide with the rest of the UK. This only further demonstrates the complication of focussing on Scottish policy where the implications of the scheme reach beyond the border. The impact on business is quite stark, with many who have invested in the technology now requiring to wait 2 ½ years to use it, and it is likely they will look to be compensated for that.
Interest rates continue to rise although the full impact of this will likely not be seen until lending currently on fixed rates come to the end of their term.
What can we do?
There is so much going on just now that it is difficult to identify one thing that would help, between keeping your prices in line with cost pressures, talent acquisition and retention, and financing, along with regular day-to-day operations.
However, the key will be to keep on top of all of this and identify your limitations, enabling you to bring in external help where required and concentrate on your core business. It is always tempting to suggest that the one thing you can’t buy is time, but bringing in additional expertise and resource can allow you to make the most of what time you have.
If you would like support and advice about how to mitigate the impact of the ongoing challenges mentioned above, please get in touch.
