Scottish business ‘resilient’ in face of trade tariffs and rising costs - RBS survey

Heightened global uncertainty and US trade tariffs are “significantly impacting” demand across the Scottish business community, a new survey suggests.

Royal Bank of Scotland’s latest growth tracker points to reduced client activity and overall caution towards spending, though there are some glimmers of hope with many firms remaining upbeat about output levels in the coming months.

The survey was conducted after US President Donald Trump’s tariff announcements on April 2, which, at the time, saw minimum tariff rates of 10 per cent applied to imports into the US, as well as higher so-called “reciprocal” rates on a number of countries. A subsequent announcement a week later saw a 90-day pause on most higher tariff rates.

Thousands of shipping containers at the Port of Felixstowe in Suffolk. Trump's tariffs are already having an impact on global trade and business confidence.

RBS’s headline growth tracker - a seasonally adjusted index that measures the month-on-month change in the combined output of the country’s manufacturing and service sectors - posted below the neutral 50 threshold for a fifth successive month in April. While the latest reading of 47.4 was up marginally from 45.9 in March to reach a three-month high, it signalled a decline in Scottish private sector activity overall. Any reading above 50 points to growth.

Sebastian Burnside, Royal Bank of Scotland’s chief economist, said: “The tracker this month reflects the challenges that economic uncertainty can create for businesses of all scales.

“Firms across the UK reported a challenging start to the second quarter, with demand for goods and services falling in all areas amid a backdrop of economic uncertainty and rising prices. While output and new orders both declined further in Scotland, rates of reduction did soften since March. More encouragingly, Scottish firms were more upbeat about the year-ahead outlook for output in April, although growth expectations are lower than they have typically been in the past.”

He said rising labour costs were adding to the pressure on businesses, following April’s hike in employers’ national insurance contributions and the minimum wage.

While manufacturers turned pessimistic last month, service providers expressed stronger confidence.

“As firms look to mitigate rising costs, we’ve seen average prices charged for goods and services increase at faster rates, as well as a greater focus on workforces,” noted Burnside. “Labour markets in all areas of the UK have felt the impact to some degree in recent months, with only Scotland avoiding a fall in employment in April.

“We cannot ignore the backdrop during which this survey was carried out but regardless, as we’ve seen in the past, UK business is resilient and can always offer reasons for optimism throughout,” he added.

Business activity declined at the UK-wide level, albeit at a rate that was softer than that seen north of the Border.

A seventh consecutive monthly decline in new business was recorded across Scotland in April. While the rate of decrease eased since March, it was solid overall, RBS noted. Anecdotal evidence generally linked the drop in sales to economic uncertainty and weaker client demand.

The downturn in new business in Scotland broadly matched that seen across the UK as a whole.

Although overall optimism regarding the year-ahead outlook for output across Scotland improved to a six-month high in April, this masked divergent trends at the sector level. While manufacturers turned pessimistic, service providers expressed stronger confidence, often due to marketing campaigns and the introduction of new services, as well as hopes of improved consumer demand as inflation and borrowing costs ease.

Moreover, Scotland was the only one of the 12 monitored UK nations and regions to see a rise in confidence, although overall sentiment remained weaker than the UK-wide average.

Following a four-month period of job shedding, employment levels were unchanged overall at Scottish private sector businesses in April. The uptick in the respective seasonally adjusted index was driven by a rise in service sector employment which offset a reduction at manufacturing firms. Some services-focused companies noted that they had increased their headcounts due to the improved availability of labour. Meanwhile, all of the other 11 monitored UK regions and nations recorded job shedding last month.

Backlogs

The latest data signalled a further fall in backlogs of work at Scottish businesses, thereby extending the current sequence of decline to 11 months. The rate of contraction was the weakest in six months but was described as “solid” and slightly quicker than the UK-wide average. Survey respondents indicated that they had sufficient capacity to process and complete orders due to subdued inflows of new business.

The April data indicated a rapid rise in input costs faced by firms in Scotland. The rate of inflation accelerated further from February and was the quickest in 22 months. Surveyed businesses pointed to higher labour costs, largely linked to increases in national insurance contributions and minimum wage rates, as well as higher supplier and material costs. Despite that, Scotland recorded the weakest cost pressures of the dozen monitored nations and regions.

Businesses reported a stronger rise in their selling prices during April. The rate of output charge inflation accelerated to the fastest for a year but was below the UK-wide trend. The uptick in charges was generally linked to the pass-through of higher input costs to clients. Of the 12 UK regions and nations, Scotland recorded the second-weakest increase in output prices, just behind the East Midlands.

The regular NatWest/RBS tracker forms part of the purchasing managers’ index (PMI) series of surveys that are now available for more than 40 countries and also for key regions including the eurozone. They are regarded as being the most closely watched business surveys in the world.