Scottish Business sentiment still in the black despite growing pressures

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BUSINESSES in Scotland were seeing some glimmers of hope in the second quarter 2022, according to the latest Addleshaw Goddard Scottish Business Monitor report, but while overall sentiment remains positive its level has fallen amid challenging conditions.

The report, which surveyed 400 firms in July from across the economy, shows that two-thirds of firms now expect growth in the Scottish economy to be weak, up from less than half of firms in the first quarter of the year.

However, despite notable declines since Q1, all sectors reported a positive net balance for the volume of business. There were also positive net balances for all sectors, except manufacturing, for the value of business activity, and positive net balances for all sectors, except admin and support services, for the level of employment.

The share of firms finding it difficult to source goods and services has declined since the last quarter, which may cool down some supply chain and inflationary pressures facing businesses. And despite those inflationary pressures continuing, the number of responding businesses reporting that they expect their prices to increase by more than normal in the next year dropped slightly, from 88% to 86%.

Unsurprisingly, the report, produced in partnership with the University of Strathclyde’s Fraser of Allander Institute, revealed that the most common concerns among responding businesses continue to be the costs of energy, the price and availability of inputs, and the availability of staff.

40% of business expect to reduce their operations this year due to higher energy prices, up from 33% in the previous quarter.

The number of responding businesses finding it difficult or very difficult to source available goods and services dropped to just under 50%, down 4-percentage points since last quarter. The situation improved slightly in the accommodation and food services sector, and more markedly in transport & storage which saw a drop from 77% in Q1 to 57% in Q2.

Wage expectation is an increasingly important factor in making the filling of vacancies more difficult.  61% of respondents now cite it up from 55% in Q1. And 1 in 3 firms were finding it difficult or very difficult to retain current staff, up from 1 in 4 in the first quarter of 2022.

Other key findings include:

  • The majority of firms expect economic and business uncertainty (87%) and staff availability (85%) to be important to their business in the coming 3 months
  • Of the firms reporting they currently had vacancies, 86% said they were finding them difficult or very difficult to fill, with a lack of skills or experience being the most common cause for the difficulty.
  • There were positive net balances in expectations for the level of employment and turnover in the coming six months. However, there were negative net balances for expected capital investment and export activity.
  • The wholesale & retail (51%), and transport and storage (43%) sectors had the highest share of firms expecting to reduce operations due to higher energy prices.
  • All transport and storage services firms, 96% of accommodation and food services firms, and 95% of firms in the wholesale and retail, and construction sectors expect to increase prices by more than, or a lot more than, normal in the coming 12 months.
  • The most common factors affecting firms’ ability to source goods and services were the lack of supply in the U.K. (36%) and the price of goods and services (33%). Other common factors included freight availability and delays (24%) and a lack of supply internationally (20%). 

Professor Mairi Spowage, Director of the Fraser of Allander Institute, said:

“Despite falling in the second quarter of the year, business confidence remains positive in our latest Scottish Business Monitor.

However, there has been a significant rise in the number of firms expecting to reduce their operations this year due to rising energy bills, and there is now a stark majority of Scottish businesses anticipating weak growth in the Scottish economy over the next year.

Scottish firms continue to face challenges attracting and retaining staff, with wage expectations increasingly making it difficult for businesses to fill vacancies.

It will be interesting to see how economic pressures and particularly wages impact businesses as we move into the second half of the year.”

Alan Shanks, Head of Finance & Projects at Addleshaw Goddard in Scotland, said:

“Everyone appreciates the challenges facing the economy at the moment. It is encouraging to see that, despite these challenges, overall business sentiment remains positive. There are signs that issues with supply chains are levelling off and we hope that this may be an indicator of improvements to come in the remainder of 2022.

“Our business community remains both resilient and creative. I know from my personal experience with the energy sector that businesses are already working hard to find ways to deal with the rising costs – the energy transition is gathering pace and there are significant opportunities for growth and investment. However, businesses will need to remain focused on managing the key risk factors identified by this latest survey.

“The only way the business community and policy makers can address the underlying issues facing the private sector is to find out what is affecting them most in their day-to-day activities, and this report is an invaluable barometer for the changes in activity and business sentiment in our economy.”

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