Economic recovery finally under way say firms

The worst of the economic crisis has passed, according to business chiefs. Picture: PA

The report from the Scottish Chambers of Commerce (SCC) reveals a marked improvement in business confidence compared with this time last year.

The analysis comes as influential ratings agency Moody’s raised the outlook for Britain’s banks to “stable” for the first time since the credit crunch.

The SCC report, which analysed the responses from 260 Scottish businesses, concluded that “the sense that the worst of the recession is over is more widely evident”, noting that confidence in all sectors had improved over the last year.

In general, businesses expected further advances in economic performance, but the business body warned that sustaining the recovery would be “hard and difficult”, pointing to weak demand and harsh trading conditions. The 30th annual survey, which was carried out in conjunction with Strathclyde University’s Fraser of Allander Institute, is the latest in a series of economic indicators to suggest a rosier economic outlook.

This week, the Royal Institute for Chartered Surveyors (Rics) Scotland reported an uplift in property sales, with more buildings selling within three months of going on the market and an increase in price rises.

Recent labour market figures have indicated rising employment levels in Scotland.

Further cause for optimism came last month, when revised GDP figures suggested that Britain did not go into a double dip recession in late 2011 and early 2012. Rather than enduring months of negative growth, the new figures suggest that the UK economy merely flat-lined.

In the latest study to offer a glimmer of economic hope, Strathclyde University researchers asked firms whether over the past three months and looking forward to the next three months they thought confidence was up or down.

The number of “down” responses was subtracted from the number of “up” responses to calculate a “net balance”, which gives a measure of business confidence.

In the tourism sector, the net balance increased from zero in the second quarter of last year to 18.7 this year – the highest increase in optimism since the recession began. Tourism businesses also reported improved visitor numbers and occupancy rates on last year.

A similar trend was seen in manufacturing, where the net balance increased from minus 3.2 to 18.1. Manufacturing firms also anticipated growing orders in the next three months, fuelled by an expected increase in exports.

Forecasts for manufacturing were also more optimistic when it came to turnover and profitability, with figures expected to rise over the coming months.

Business confidence in the construction sector improved, although the net balance remained negative, moving from -15.8 in quarter two last year to -3.5 quarter two this year.

However, more than half of construction firms reporting working below optimum levels and the sector as a whole predicted a fall in contracts and orders.

Labour market activity remained subdued, with the majority of sectors reporting no change to employment levels, providing more evidence that the road to a full recovery will be long and steep.

The challenges of stimulating a sustainable recovery were also reflected in declining retail sales, with more than half of firms reporting a drop in the amount shoppers were buying.

Looking at the overall economic picture, however, the analysis concluded the outlook was more positive than previous reports and the SCC praised the Scottish Government’s approach to increase capital spending.

Garry Clark, head of policy and public affairs at SCC, said: “Our latest survey indicates stronger signs of an economic recovery, with more positive trends and expectations compared to a year ago.

“Nevertheless, demand still remains weak and much continues to depend upon a return to growth in our major export markets, increased participation in exporting by Scottish businesses and on the policies of the Scottish and UK governments.

“There are more positives to take out of this quarter’s figures, particularly the improving business confidence and the generally stronger expectations as to business conditions over the next 12 months.

“There are signs that the construction industry is continuing to improve and that tourism is having a better season than last year, with some early indications that discounting may be becoming less prevalent.

“The policy of the Scottish Government to maximise capital spending – now also, belatedly, being pursued by the UK government – is extremely welcome and we believe that this investment will achieve the maximum long term benefits to the economy if priority is given to transport and affordable housing projects.”

Mr Clark said more action was needed and called on the Scottish Government to reduce business rates for small and medium-sized businesses that did not benefit from the small business bonus scheme.

He added: “The danger is that, in the lead-up to polls in each of the next three years, politicians are tempted to focus on quick fixes rather than delivering the sustained support for growth that business needs.”

One of the report’s authors, Cliff Lockyer, a research fellow at Strathclyde University, said: “A year ago there was a lot more pessimism, but now there are signs of a fragile recovery emerging. There is more pick-up in businesses, although they are still working from a low base.

“The Scottish Government should be applauded for concentrating on capital projects and affordable housing, but more needs to be done.”

The Scottish Government welcomed the survey’s findings, suggesting they showed that its economic approach was bearing fruit.

A spokesman said: “This report provides further evidence that Scotland’s economy is strengthening This report follows positive indicators of growth in the latest labour market figures, which marked another rise in employment, with an increase of 47,000 people in work across Scotland.

“This government is working tirelessly to retain Scotland’s position as the best place to do business and despite UK government funding cuts, our business rates relief package will reduce business rates taxation by £560 million this year.

“As the Chambers of Commerce highlight, we are also investing in infrastructure – our schools, roads and hospitals –both to stimulate growth in the short term and lay the foundations for long-term success. This investment is set to top £3.4bn in 2013-14, which is estimated to support more than 40,000 jobs across the Scottish economy.”

He added: “The Scottish Government is taking action where we can, and we are seeing results, but there is so much more that we could be doing with the full economic and fiscal powers of independence to strengthen our economy and create jobs.”

Housing crisis ‘will last 20 years’

Scotland’s housing crisis could take 20 years to solve amid rising population levels and more people living in their own, a public spending watchdog has found.

Audit Scotland says the supply of housing is not meeting current need, after the number of new private homes being built fell by a half in recent years.

There has been a shortfall of almost 14,000 social houses since 2005, while Scottish Government housing budgets have fallen by a quarter in recent years.

Conservative housing spokesman Alex Johnstone said: “This is a damning indictment of a housing policy that is failing to deliver, doesn’t plan for well documented demographic changes and lacks the innovation required to lever in extra finance to build the homes we need.

“The Scottish Government has slashed the housing budget, its funding methods are confusing and its attempts at using alternative funding models have been limited.”

It it estimated Scotland will need half a million new homes over the next 25 years, but the number of new private homes being built in Scotland has more than halved since 2007-8, when the economic crisis took hold, to about 10,000 annually.

The Scottish Government has cut its capital housing budget by 29 per cent, from £534 million to £378m, between 2008-9 and 2011-12, the report says.

Caroline Gardner, auditor general for Scotland, said: “Budgets are tightening, while demand is increasing and fewer houses are being built.

“The Scottish Government has an ambitious vision for housing. It needs to work with councils and their other partners to make sure that clear, long-term plans are in place to address challenges and to help them tackle important issues like homelessness and the quality of housing.”

The Scottish Government has set out its vision to provide an “affordable home” for all by 2020. In 2011, it set a target of 6,000 new affordable homes a year.

However, Audit Scotland said the supply of housing was not keeping up with need, and the Scottish Government had to clarify how it would make sure its targets were met.

A Scottish Government spokesman said it was taking “decisive action”. “We are investing nearly £900m over three years as part of our target of building 30,000 new, affordable homes over the lifetime of this parliament,” he said.

Moody’s gives UK banks a thumbs-up

The UK’s banks are now strong enough to face another crisis, an influential ratings agency said yesterday as it lifted the sector’s outlook for the first time since the credit crunch.

Moody’s said Britain’s brighter economic prospects and lenders’ stronger balance sheets were behind its upgrade of the UK banking system to stable from negative – a view it has held since May 2008.

The agency added that once regulators’ demands for banks to bolster their finances by another £13.4 billion have been satisfied, they will be better capitalised than their European rivals.

Moody’s said it did not expect the operating environment for banks to worsen, adding profits would rise from their “very low levels”, while bad debts would shrink.

The upgrade comes weeks after the government announced plans to begin the sale of its stake in Lloyds Banking Group – one of a number of lenders bailed out with public funds during the 2007-9 banking crisis – marking a landmark moment in the sector’s recovery.

The agency said low unemployment had helped contain bad debts, adding that the Bank of England’s desire to keep interest rates low would ensure households and businesses could service their debts.

Moody’s said: “We believe that UK banks are sufficiently well-capitalised to sustain expected losses from both our central and adverse stress scenarios.”

City watchdog the Prudential Regulation Authority recently told banks they must stump up another £13.4bn to plug a bigger-than-expected £27.1bn hole in their finances, under plans to ensure they are strong enough to withstand future shocks.

Moody’s said once these demands were met, UK banks would be “well capitalised for the risks they face and will compare favourably to their European peers”.

It said over the past five years lenders had bolstered their defences against funding shocks by reducing dependence on wholesale money markets, narrowing funding gaps and increasing their holdings of liquid assets, which can be sold quickly in a crisis.

Analysis: More reasons to be cheerful than before

The latest Scottish Chambers of Commerce (SCC) quarterly survey shows Scottish firms are cautiously optimistic about the future and believe the worst of the recession is behind them.

However, caution is the watchword. There are still concerns about the extent to which government policy is aimed at sustainable economic growth rather than at electoral success. The supply of credit to smaller companies is also a continuing concern.

While the private sector would welcome an expansion of public investment, private investment in Scottish manufacturing is aimed mainly at replacing existing equipment or in making efficiency improvements.

Lack of confidence in future economic prospects is holding back a bigger increase in the private sector investment, an essential underpinning for a sustained long-run recovery. The UK now comes 159th in the international league of the share of investment in GDP – lower than Mali. This illustrates how far it has fallen as a favoured investment destination and implies a weakened growth potential compared with other developed countries.

Some of this caution about investing in future growth is evident in the SCC survey. A substantial balance of Scottish firms in construction and wholesale expect to reduce investment, while there was a modest favourable balance among manufacturers.

The SCC survey also shows that business confidence in Scottish manufacturing increased sharply in the second quarter, with strong growth outside Scotland. Export orders are expected to rise further during the remainder of 2013. This contrasts with the experience of the UK as a whole, where manufacturing output fell by 0.8 per cent in May. The UK trade balance also worsened in May, to £2.4 billion.

Optimism in the construction sector has declined, with substantial falls in orders expected in the public sector and in housing. Wholesalers are also depressed, with a balance of 42.9 per cent of firms having had falling orders during the past three months. Retailers were also less optimistic, expecting reductions in cashflow, turnover and profitability. However, they were slightly less depressed than in the last quarter of 2012 and the first of 2013.

This is perhaps the best way to read the SCC survey: things are still bad, but not quite as bad as they seemed three months ago.

• David Bell is an ESRC research fellow at the University of Stirling.