The latest national Business Confidence Monitor (BCM) for Q4 2024 shows a significant decline in sentiment from the previous quarter, with confidence only just remaining positive, as businesses digest the implications of the proposed tax increases in the Autumn Budget and domestic sales growth eased.
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 14 October to 13 December 2024.
- Sentiment in Scotland declined marginally in Q4 2024; however, the region was the most confident part of the UK with the Index sitting at +13.1, significantly above the UK average (+0.2) and its historical average (+6.3).
- The relative optimism of Scottish businesses is underpinned by strong domestic sales and export growth, which is expected to continue in the year ahead, driving the sharpest profits expansion of any region over the coming year.
- However, businesses also reported above-average input price and selling price inflation in the year to Q4 2024, although they expect significant moderation over the next 12 months.
- The tax burden is now the most widespread rising challenge in Scotland, overtaking regulatory requirements.
- Capital investment growth in Scotland was stronger than most other parts of the UK but businesses expect spending growth will soften in the coming year. In contrast, Scottish companies plan to increase R&D Budgets at a stronger rate than most other regions over the next 12 months.
Business confidence in Scotland
Sentiment in Scotland softened for the second consecutive quarter in Q4 2024. The Business Confidence Index dipped from +14.2 in Q3 2024 to +13.1. However, this was a comparatively modest decline compared to other parts of the UK, and left Scotland as the most confident region in the UK, with Scotland’s index significantly above the national average of +0.2 and over double its historical average of +6.3.
Domestic sales and exports growth
Underpinning the relatively buoyant sentiment, annual domestic sales growth increased for the second quarter in a row in Q4 2024, rising to 5.3%. This rate of growth was significantly above the national average of 3.2% and was only marginally slower than the fastest expansion recorded in the North West (5.4%). Businesses in Scotland also anticipate the largest uplift in domestic sales of any UK nation or region over the next year, with a projected rise of 6.9%, more than double the historical average (3.0%). This projected rise in domestic sales is likely linked to the expectations of businesses within the Energy, Water & Mining sector, which accounts for almost twice the level of activity of the national average.
Scotland also recorded the strongest annual increase in exports of any region in Q4 2024, with a growth of 4.4% in that quarter. Scottish companies also expect this comparative strength will continue over the next year, with a projected expansion of 5.9%, compared to the UK average of 4%, and nearly double Scotland’s historical average of 3.0%.
Business challenges
The announcements in the Autumn Budget have sparked increased concerns regarding the tax burden in Scotland, with 43% of businesses citing the issue. This was a survey record high and was only a more prominent issue in Yorkshire & Humberside and the East of England. However, regulatory worries continue to be one of the most widespread rising challenges for Scottish companies behind the tax burden challenge, with the proportion of businesses reporting regulatory requirements remaining unchanged from the previous quarter in Q4 2024, at 34%. This remained below the historical average of 44% and was only a less prevalent concern in the West Midlands.
Competition in the marketplace and customer demand were the next most widespread concerns faced by companies in Scotland, however, both these issues were less prevalent in Scotland than the UK average, with the latter challenge reported less in Scotland than in any other region. Consistent with Scotland’s strong sales performance, customer demand was cited as a growing concern by just 24% of businesses, below the national average of 33% and the historical average of 34%.
Labour market
Employment growth in Scotland spiked in Q4 2024, rising to 4.4%, the strongest growth ever reported in the survey and significantly outpacing all other UK nations and regions. Businesses in the region plan to reduce the rate they expand their staff levels over the next 12 months, however, Scotland will still marginally outpace the 1.9% growth projected nationally and ahead of the historical norm (1.2%), with a projected growth of 2.2%.
Salary growth slowed compared to the previous quarter, rising broadly in line with the national average (3.1%), with an expansion of 3.2%. Businesses in the region expect wages growth to moderate over the coming year, however, the anticipated growth of 2.7% is above the region’s historical average (2.2%) and matches the growth projected nationally.
The ability of businesses to recruit more employees to meet growing sales could be limited by the availability of suitably skilled labour. In Q4 2024, 20% of Scottish businesses cited the availability of non-management skills as a growing concern, marginally above the national average (18%).
Input, selling prices and profits growth
After increasing in the two previous quarters, input price inflation slowed marginally to 4.1% in Q4 2024 but remained above the 3.7% increase recorded nationally. Looking ahead, businesses in the region expect input cost growth to slow significantly to 2.7%. This anticipated increase matches the UK average projection and would close the gap to Scotland’s historical average (2.6%). The slowdown in input price inflation forecast is at least partially linked to the low inflation expectations of Energy, Water & Mining and Manufacturing & Engineering businesses, due to the substantial concentration of these industries operating in Scotland.
As input price inflation eased in the year to Q4 2024, companies in Scotland reduced the rate at which they raised their selling prices, from 4.0% in the previous quarter to 2.6%. The increase in prices charged to customers was broadly in line with the national average of 2.5%, however, still significantly above the historical average (1.5%). Further moderation is anticipated over the next 12 months, with businesses in the region planning to increase prices by 2.2%, equaling the rise expected nationally (2.2%)
Strong domestic and export sales growth for Scottish businesses were seemingly partially offset by increases in costs and salaries in the year to Q4 2024. As a result, companies recorded profits growth of only 3.0%, lagging both the region’s historical norm (3.5%) and the national average (3.3%). However, with sales growth projected to improve and input cost and salary expansion each expected to ease further over the next 12 months, Scottish companies project the strongest profit expansion of any UK nation or region, with growth of 6.3% anticipated.
Investment
Scottish companies increased investment expenditure for the second consecutive quarter, with growth of 3.6% in the 12 months to Q4 2024. Only businesses in the North West (3.8%) recorded stronger capital investment growth, with the region also outpacing its historical average of 2.2%. However, increased economic uncertainty and high interest rates appear to be influencing company investment plans, with Scottish companies expecting to reduce investment growth below the historical average over the next year to 1.7%, lagging marginally behind the national projection of 1.8%.
R&D budgets have followed a different trend. After reducing their R&D budgets in the previous quarter, businesses in Scotland increased them by 2.5% in the year to 2024, only lagging companies in the East Midlands. Scottish companies plan to ease growth marginally over the year ahead, to 2.0%. However, while this increase will marginally lag the region’s historical average of 2.1%, the comparative strength of R&D spending in Scotland is set to continue over the coming year, with companies in the region planning to uplift budgets at a faster rate than almost all other regions.
