The latest national Business Confidence Monitor (BCM) for Q3 2024 shows a slight drop in sentiment. However, confidence remains high as businesses continue to expect sales and profits growth to improve significantly in the year ahead.
The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The latest quarterly findings are based on the period 15 April to 22 June 2024.
- Business confidence in Scotland only saw marginal improvement in Q2 2024 with the Index increasing slightly to +15.6, from +15.4 in the previous quarter. While the Index remains well above its historical average, it lags the UK average.
- Despite recent performance, Scottish companies expect to outpace all other regions in terms of both domestic sales and export growth over the coming year and are optimistic that profits growth will improve significantly.
- The pick-up in sales should be aided by the continued softening of input price inflation, although businesses in Scotland forecast the joint-highest input price rises in the UK.
- Regulatory requirements are still the most widespread rising challenge in Scotland and are more prevalent here than anywhere else in the UK.
- Labour market challenges are also more prominent in Scotland, including the availability of non-management skills and Scottish businesses anticipate the fastest rate of salary growth next year.
- Capital investment growth outpaced the national average and businesses expect to double the rate over the next year, with Scotland set to have the strongest investment expansion. Scotland’s R&D growth also outpaced the UK but businesses plan to moderate growth to broadly match the national average.
Business confidence in Scotland
Business sentiment in Scotland has closely tracked the UK average in recent quarters, and this trend continued in Q3 2024, as confidence dropped slightly to +14.2 from +15.6 in the previous quarter and is close to the UK average (+14.4). Confidence among Scottish businesses remains comfortably above its historical average of +6.2.
Domestic sales and exports growth
Annual domestic sales growth increased for the first time since Q1 2023, with a 3.5% increase in Q3 2024, climbing above its historical average (3.0%) but was marginally below the rise seen in the UK as a whole (3.8%). Further improvement to 4.3% is anticipated for the coming year, however, the expected rise is weaker than most other UK regions, only outpacing Yorkshire and the Humber. The anticipated rise in domestic sales in the Energy & Water sector should support growth in Scotland as the sector accounts for almost twice the level of activity than the national average. However, Scotland is underrepresented in other sectors expecting a pick-up in sales growth this year, particularly IT & Communications.
Annual exports growth continued to ease in Q3 2024, dropping to 1.1% from 3.0% in Q2 2024, with only the West Midlands recording a weaker expansion. The relative importance of Manufacturing & Engineering and Energy & Water to the Scottish economy is likely weighing on exports growth and the outlook remains challenging, with Scotland forecasting the slowest exports growth in the UK, at just 1.0%.
Business challenges
Regulatory requirements remain the most widespread challenge faced by Scottish businesses in Q3 2024, with 34% of businesses citing them as a problem, dropping below the historical norm for the region. Competition in the marketplace and customer demand are the next most prevalent challenges faced by companies in Scotland, however, both these issues are less prevalent in Scotland than the UK average, with the latter challenge reported less in Scotland than in any other region.
Relatively more prevalent in Scotland is concern about non-transport infrastructure problems such as postal and communications including broadband, which is more common here than elsewhere in the UK. The proportion of businesses reporting the issue spiked in Q3 2024 to 18%, double the historical average (9%). This could relate to OFCOM evidence that 33% of commercial premises in Scotland have full-fibre broadband connectivity, compared to the UK average of 40%.
Labour market
Employment growth in Scotland picked up slightly in Q3 2024 to 1.7%, further widening the gap to the region’s historical average (1.2%). The comparatively weak domestic and export sales outlook is likely feeding into Scottish companies’ employment plans for next year, with a projected employment increase of 1.1%, the softest rise of any UK region.
Salary growth remained constant with the previous quarter, rising by 3.9% in Q3 2024 and outpacing the national average (3.6%). The slowdown in employment growth could also feed into lower wage growth next year. Indeed, Scottish companies expect salary growth to fall to 2.4%, only marginally above the 2.2% historical average, outpacing only the West Midlands.
Input, selling prices and profits growth
Input price inflation rose for the second consecutive quarter in Q3 2024, as businesses recorded sharper annual increases than any other region at 4.7%. Over the year ahead, Scottish companies anticipate that cost rises will ease significantly to 2.0%, dropping below the historical average of 2.6%. Only businesses in Yorkshire and the Humber expect lower input price increases over the next 12 months. This relatively modest input price inflation forecast is at least partially linked to the low inflation expectations of Energy & Water companies, due to the large regional concentration of the sector.
Reflecting the large uplift in input costs, companies in Scotland lifted their selling prices at a faster rate than any other UK region in the year to Q3 2024, up 4.0%. This price rise was only marginally behind the region’s historical high of 4.3%. As input costs recede, businesses in the region are projecting a more modest price rise of 2.3% for the coming year, broadly in line with the growth expected in the UK (2.2%).
Weak exports growth and high input cost inflation have hindered profits growth in Scotland, and businesses reported that profits expanded by just 2.6% in the year to Q3 2024, notably lower than the historical norm of 3.5%. Despite a significant uplift in profits growth expected in the coming year, the projected 4.6% increase for Scotland is below the UK average (5.1%), with weak sales and exports projections likely to continue weighing on profit expectations.
Investment
Capital investment growth in Scotland picked up from the previous quarter, rising by 2.9%. This was above the historical average (2.1%) and was also among the strongest increases in the UK, with only London recording stronger growth. While Scottish businesses are planning to ease the rate of expansion in the next 12 months, the projected increase of 2.4% is above the expected UK average (1.9%), with only companies in the South West planning a larger rise over the next year.
In contrast, businesses in Scotland reduced their R&D budgets in the year to Q3 2024, the only part of the UK where this was reported. The 0.3% decline was the first drop in budgets since Q3 2021 and whilst growth is expected to resume over the next year, the projected increase of 1.0% will be less than half the average historical rate (2.1%).
