Bill Jamieson: Outlook changeable on confidence barometer

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Good news – or so it seems – from the latest survey of business confidence in Scotland. According to fresh readings on the Bank of Scotland’s Business Barometer, confidence among businesses in Scotland has “remained steady” for a second month in a row.

Economic optimism stood at 9 per cent in August, an increase of seven points on the previous month. And a net balance of 6 per cent of businesses in Scotland expect to hire more staff during the next year.

So far, so encouraging. And all the more so given the almost daily hand-wringing and expressions of concern over business uncertainty caused by Brexit. Indeed, it seems remarkable that there is much by way of confidence in Scottish business with Michael Russell, the Scottish Government’s Minister for Brexit, using every opportunity to warn over a Brexit “catastrophe” and “devastation” that awaits in the event of a no-deal outcome.

However, read a little further into the bank’s Business Monitor report and the findings are not as upbeat as the opening sentence of its press release suggests.

It finds that companies reported lower confidence in their own business prospects – here the barometer reading fell six points to 25 per cent. And the net balance of businesses expecting to hire more staff is down seven points on July.

So is Scottish business confidence as strong as a preliminary reading suggests? And what faith can we place in surveys of this sort?

“Business confidence” by its nature is a fragile and volatile element, influenced by sentiment as much as an objective assessment of business conditions. Sunnier weather, subjective feelings of well-being, success for the national football team – even optimistic business forecasts themselves – can all have an influence in responses to surveys.

Confidence can vary sharply, both between sectors and within them. Construction may be down, manufacturing on the up and business services buoyant while morale in retail is plunging. Yet even within retail there are hot spots of optimism, rare though they may be at present. All businesses may look the same but each is different in its own particular way.

And findings can be mercurial. An unexpected event or external development, such as a sudden rise or fall in the pound or stock market prices can trigger a sharp change in business mood. Even pub conversations can leave us elated or depressed about the outlook. After all, if everyone else is feeling happy/gloomy, who wants to risk swimming against the tide?

Yet great attention is paid to confidence indicators as a guide to morale across the business world and the propensity of businesses to invest and expand.

The Bank of Scotland’s Business Barometer questions 1,200 UK businesses – 90 in Scotland – each month. The overall message from the latest survey appears to be one of resilience. As Fraser Sime, the bank’s regional director, says: “To see overall confidence holding firm demonstrates the continued resilience of Scottish businesses during uncertain times.”

And this would seem to be in line with recent survey results. The June Business Barometer recorded that overall business confidence in Scotland rose nine points since May to 24 per cent. Confidence in business prospects stood at 29 per cent and economic optimism at 18 per cent. Companies’ hiring intentions showed a net balance of 16 per cent and businesses expected to hire more staff during the next year.

Longer term, the underlying trend in Scotland during 2018 showed businesses’ confidence growing slowly despite the fact that they are becoming less optimistic about the state of the UK economy overall, with confidence in the second quarter of 2018 at 23 per cent, two points higher than during the first quarter.

What of the broader UK context? Across the UK, firms in the manufacturing sector remained most confident, but the confidence of construction businesses fell sharply. In Scotland, a net balance of 19 per cent of businesses said they felt Brexit was having a negative impact on their expectations for business activity, up one point on a month ago.

Yet a review of the manufacturing engineering sector has suggested a continuing positive quarter overall for the third time in 2018. A report by industry support body, Scottish Engineering, said order intake and exports “remain positive at less than five per cent above even”.

Meanwhile, what of foreign direct investment (FDI) into the UK and Scotland – a key barometer of international confidence? The latest annual Global Trends report by tech giant IBM estimates a record number of jobs were created last year as a result of new money pouring in. It reckons 51,000 jobs were created last year across 1,229 new FDI projects – the highest figure since IBM began compiling the reports in 2002.

The Department for International Trade estimates foreign investors are now holding a record £1.2 trillion of assets in the UK in relation to FDI projects.

And Scotland has attracted a new record of FDI in 2017 for the third consecutive year and set a new ten-year high, according to EY’s latest Scotland Attractiveness Survey.

Last year Scotland experienced a seven per cent increase in the number of projects it secured, taking the total up to 116 from 108 in 2016. This rate of growth was higher than the UK as a whole at six per cent, and as a result, Scotland’s share of UK FDI projects increased by 0.1 per cent in 2016 to 9.6 per cent in 2017, which is above its historical average of 9.3 per cent.

Finally, the latest data on private sector performance can also be fairly regarded as a confidence indicator. In the latest CBI Growth Indicator survey, UK private sector growth picked up in the three months to August. The composite measure – based on 698 respondents across the distribution, manufacturing and service sectors – showed the balance of firms reporting a rise in output at plus 19 per cent, up from plus 14 per cent in the three months to July.

This pick-up was driven by stronger growth in business and professional services and distribution, with retail volumes expanding at the fastest pace in a year. Growth slowed in manufacturing and consumer services but remained above the long-run average in both sectors.

Headline-grabbing though confidence surveys can be, they are no substitute for real-world growth in sales and profits. Let’s keep an eye on the real prize.