Small firms' costs fall … but so does demand for products

Published on Monday 15 June 2009 21:42

SMALL businesses in Scotland reported a 1.2 per cent drop in running costs in the first quarter of this year, according to data released yesterday.

Throughout the UK, deflation stood at 1.4 per cent, with falls in the costs of labour, advertising, vehicle and raw materials driving down bills for businesses.

In the final quarter of 2008, costs had fallen by 2.4 per cent. But while costs continue to fall, profit margins remain under "huge stress" due to low demand for products and services.

Mike Bowman, head of More Than Business, which compiled the data with Warwick Business School, said: "The fact that we're experiencing such sustained deflationary conditions demonstrates just how deep the recession has become in Scotland.

"While it is cheaper to run a small business, it is clear that demand for goods and services is dropping off considerably and that is why prices are spiralling downwards."

He said the lower figure for Scotland could be due to the higher proportion of service firms north of the Border, while manufacturing firms were more affected by decreases in energy, fuel and material costs.

Andy Willox, Scottish policy convener at the Federation of Small Businesses, said: "Different types of businesses' overheads are subject to different sorts of cost fluctuations. However, it is true that many of our members are driving harder bargains and offering tighter deals than they ever have done in the past.

"These factors could be described as contributing to deflationary pressures and this might not be a bad thing in itself for some.

"But there's always the worry that we'll see businesses and the general public holding off spending in the expectation that costs are going to drop further."

&#149 Scottish small businesses are "cautiously optimistic" about their ability to benefit from the economic upturn, according to a survey published yesterday.

Insurance firm QBE said 82 per cent expect their turnover to grow or at least be stable for the remainder of the year.

But 63 per cent of firms think the current recession represents the "most difficult conditions in living memory", up from 53 per cent in the firm's previous survey last November.