George Kerevan: Reasons to be cheerful – as long as the banks don't spoil it all

Published on Tuesday 3 November 2009 20:00

LAST week's publication of the annual compendium of "Scottish Corporate Sector Statistics" provides a better than normal chance to divine what is going on in the local economy at a structural level.

Ultimately, how Scotland copes with the recession and the credit crunch will be determined more by entrepreneurship and native business acumen than by macroeconomic policy.

The headline finding is that the total number of private-sector enterprises in Scotland increased by a healthy 3.3 per cent in the year to March 2009, giving a total of 291,380 businesses. The increase in the preceding year was only 0.9 per cent, suggesting the global crisis was slow to bite entrepreneurial initiative north of the Border.

It is true that the first crude GDP figures for the second quarter of 2009 show Scotland slowing faster than the UK average – an indication our export industries were taking a hit. However, if we can continue to grow new businesses at such a clip, then a rebound is possible. Over the medium term (between 2000 and 2009), the total number of enterprises in Scotland increased by 22.5 per cent – an extra 53,550 firms.

Unregistered companies – small firms that have an annual turnover below the VAT threshold and do not have employees – accounted for most of the rise in the total number of Scottish enterprises in 2009. The number of such firms increased by 7.5 per cent. This might indicate that some of the newly unemployed are seeking to create their own work opportunities. If so, it is still a healthy reflex.

However, total employment in private-sector enterprises – both registered and unregistered – rose by 2.2 per cent over the year till March, up 42,350 to two million despite the onset of the crisis. Obviously, time lags may be involved here and clearly the recession has started to push up unemployment (though it seems to be hitting the smaller towns more than the big Scottish conurbations). But all things being equal, there seems to be a more healthy dynamic in the Scottish private sector than many have sometimes feared.

Enterprises whose ultimate ownership lies outside of Scotland now account for 3.1 per cent of businesses but 35.3 per cent of employment. Within large firms (those with 250+ employees) foreign-owned companies account for 80.8 per cent of businesses and 63.5 per cent of employment. No great news here, as foreign ownership has dominated the manufacturing and production industries for decades.

However, the recent bubble economy reinforced this state of affairs, with highly leveraged European concerns buying up much of what was still locally owned. Fortunately, our airports and power generation can't be moved abroad. The danger come the crisis is that cash-strapped foreign owners reduce local investment or take their eye off the management ball. With Spanish-owned BAA being forced to sell one of its Scottish airports, there is a chance for some Scottish enterprise to shine.

The latest corporate review continues to underline the big gap in Scotland between the large firms and the small. The 289,065 SMEs account for 99.2 per cent of enterprises and 52.8 per cent of employment, but the 2,315 large enterprises produce 59.7 per cent of all turnover. The point is that we are not advancing enough SMEs into larger firms by natural growth – a perennial Scottish weakness.

The number of small private enterprises in Scotland (those with up to 49 employees) has increased by 9,160 (3.3 per cent) since March 2008, to 285,425. Employment in the sector has risen by 17,360 (2.2 per cent) to 797,460 in the same 12 months. And since 2000, the number of small enterprises has gone up by 53,190, or 22.9 per cent. Again, this is a positive development and may indicate cuts in the business rate are having an impact.

Business sectors that experienced the largest increases in the number of private firms in the year to March were education (up by 2,770 to 10,840 enterprises) and financial intermediation (up by 730 to 3,250). This may reflect individuals setting up private consultancies. However, enterprises in mining, quarrying and utilities were up by 605 (22.1 per cent) to 3,350. Business activities, real estate and renting were up by 16,390, despite the bursting of the housing bubble.

Overall, the latest review reveals more strength and weakness. The danger is that a lack of bank credit in the crucial SME sector reverses these positive trends.