CENTRAL to any assessment of our prospects is the state of business confidence – a critical indicator of investment, expansion and staff hiring plans in the period ahead.
So it is troubling to read an assessment last Friday that business confidence in Scotland has fallen to its lowest level in more than two years.
The survey is in marked contrast to other recent pointers, ranging from Bank of Scotland data to the CBI Growth Indicator last week. And it’s fair to stress that these surveys remain firmly in positive territory.
This is a shading of growth, not a plunge back towards recession. Nevertheless, it is a jolt, and a reminder that firms are having to contend with a changing – and at times worrying – wider environment.
It may also be the first indicator that concerns over political uncertainty are creeping in, with poll data still indicating the likelihood of a hung parliament at Westminster in May.
And for Scots firms, that uncertainty is not lifted after the election. New tax changes are pending under the Scotland Act while battle rages over “more powers” envisaged by the Smith Commission. Businesses will almost certainly have to contend with changes, not only to tax rates and levels but also to tax reporting and payroll administration, with no certainty of outcome at least until after the Holyrood election in 2016.
The survey, conducted by the Institute of Chartered Accountants in England and Wales (ICAEW) and Grant Thornton UK, revealed a notable drop in confidence from the previous quarter. It is also well below the UK average.
More than a third of respondents said that competition is a greater challenge than it was a year ago, while customer demand is also a growing issue.
Grant Thornton’s Scotland managing partner Kevin Engel said: “Given the impact of lower oil prices, UK elections, weak European economic growth and overseas political unrest, it is not surprising confidence has dropped.”
The survey tallies with evidence of sluggish retail sector performance after the Christmas sales binge and wider indicators testifying to a slowdown in the pace of growth in recent quarters.
One factor that business has not had to worry about as inflation has fallen to near zero is the “normal” feature of a recovering economy: rising interest rates.
The Bank of England is almost certain to keep rates at their historic low of 0.5 per cent. Back in March 2009 the consensus was that such an ultra-low rate would only be needed for a few months while confidence stabilised. Now an eighth year of this “emergency” rate can’t be ruled out. However, Howard Archer, chief economist at Global Insight, expects the Bank to hike rates to 0.75 per cent by February 2016 “at the latest”.
More important than whether the Bank raises rates in late 2015 or waits until early 2016 is the prospect beyond: rates are likely to rise only gradually to 1.5 per cent at the end of 2016 and to 2.5 per cent at end 2017, based, says Dr Archer, “on the expectation that growth will hold up pretty well” and that consumer price inflation, currently 0.3 per cent, will not get back up to 2 per cent until early 2017.
So where are the economic weak spots to be found? Revised data on UK GDP for the fourth quarter of last year, out last week, showed GDP growth at 0.5 per cent, slower than earlier in 2014, though the year-on-year growth at 2.7 per cent was the strongest since 2007. A breakdown of the figures revealed that household consumption was not as strong as previously thought and hardly merited the MPC’s description of “robust”. Gross fixed capital investment slipped by 0.5 per cent on the quarter. Detailed capital investment figures show that the rising trend in investment in private housing was well maintained but there was a fall in spending on “other buildings and structures” – an early sign perhaps that political uncertainties are starting to affect business confidence.
More positively for business and households, the income measure of UK GDP showed continuing solid growth in “compensation of employees” – up by 1.3 per cent on the quarter and 4.3 per cent higher on the year. In both real and nominal terms, the long squeeze on wage income seems to be ending. This would bode well for consumer spending in the year ahead. The upward trend in non-financial companies’ surpluses has also been maintained.
While the latest CBI data also points to a slowdown in the three months to February, growth was still maintained at a strong pace. Its survey of 842 respondents across manufacturing, retail and services showed continued solid growth in the private sector, with a balance of plus 19 per cent this month.
The overall outlook for the next quarter is positive, with growth expected to rise further (plus 26 per cent).
Business volumes growth remained steady in the services sector, and manufacturing output growth picked up, with manufacturers’ expectations for the coming three months hitting a five-month high.
Finally, the monthly European Commission consumer confidence survey shows a slight rise in its consumer confidence index from January, and is now at its highest since last October. Among people in full-time work, there has been a further marked improvement in the readings for the changes in people’s own financial position over the last year and their expectations for their own financial position in the year ahead. For both series, the latest reading is the highest since the pre-crisis period.
As Citi economist Michael Saunders comments: “The improvement in real wages is not just evident in the economic statistics but now is being felt widely among those in work.”
This has been a long time coming and, concerning though it is, the downbeat Grant Thornton survey needs to be balanced against this improving prospect.
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