Scottish business confidence turns positive for first time in year despite inflation woes

Business confidence in Scotland has turned positive for the first time in a year despite companies battling record rates of input price inflation, a survey today reveals.

Chartered accountancy body ICAEW’s latest business confidence monitor puts sentiment levels at +6.4, up from -0.2 in the previous quarter. This is broadly in line with the UK average, and slightly above Scotland’s historical average. Scotland saw the highest export growth in the UK, and domestic sales had one of the largest rates of increase too, at 5.6 per cent compared to the UK’s 4.9 per cent. However, the growth of both exports and domestic sales is expected to slow in the year ahead, with the latter forecast to be the slowest in the UK.

The business confidence monitor, which has been running since 2004, is one of the largest and most comprehensive quarterly surveys of UK business activity. The ICAEW said companies in Scotland had been facing a number of challenges, including record annual input price inflation which has been driven by the cost of energy, commodities and wages. Input price inflation is running at its fastest rate north of the Border since the survey began, though this is expected to slow down in the next year.

David Bond, ICAEW director, Scotland, said: “It’s pleasing to see that confidence is back in positive territory, but while we are seeing rising profits, increasing investment and the highest export growth in the UK, these findings show that there are still very real difficulties to address. In particular, record input price inflation is having a real impact, while our businesses also reported growing challenges from the tax burden and regulation. It’s time for the UK and Scottish governments to deliver a growing and resilient economy which enables businesses of all sizes to operate effectively.”

David Bond, ICAEW director, Scotland: 'It’s pleasing to see that confidence is back in positive territory.'

The survey found that salary growth is running at more than double the historical average, reflecting a continued demand for workers. This growth is expected to ease next year. The workforce in Scotland is expanding close to its historical high but that rate is said to be on a downward trend, mirroring expectations around domestic sales and exports. Despite the higher costs for businesses, profits are continuing to rise, with average growth of 5 per cent expected to continue into the next year.

Meanwhile, 44 per cent of businesses surveyed cited regulatory challenges as a growing difficulty, which may reflect the prominence of banking, finance and insurance in Scotland’s economy, the ICAEW noted. Concerns about the tax burden have reached a historical high, likely related to the recent increase in corporation tax. The number of businesses concerned about bank charges has jumped - some 24 per cent of companies reported it as an issue, up 15 percentage points since the previous quarter.

Research and development budgets in Scotland are growing at the fastest rate in the UK, according to the monitor, although a slowdown is expected next year. Capital investment is up, and at similar levels to the UK average, although these levels are likely being held down by weak confidence and higher levels of spare capacity than the UK average.

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