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Weakest figures for three years

Business confidence in Scotland ‘worst in UK’ says report

Scottish exportsBusiness confidence in Scotland has fallen into negative territory for the first time in three years and is the least optimistic part of the UK, according to a shocking new survey.

There has been a slowdown in profits growth, sales volumes and turnover while export figures show overseas sales rising by just 0.6% in the last year.

The figures are revealed in the latest ICAEW/Grant Thornton UK Business Confidence Monitor and make grim reading for the Scottish government ahead of a gruelling year-long general election campaign.

Scottish businesses recorded a confidence score of -7.4 (down from +3.6 for Q1) this places the Scottish score well below the UK average of +16.6 for Q2. The result indicates that Scotland is the least confident part of the UK; the only area to record a negative confidence score this quarter.

Scottish businesses have experienced a sustained slowdown across a range of key financial performance indicators. Year-on-year profit growth has fallen from 6% in Q2 2014 to 3.3% in the latest quarter and similar decelerations have been experienced in sales volumes and turnover. Export growth has seen a notable decline in recent quarters – overseas sales increased by just 0.6% over the last 12 months, compared with a 3.1% increase in the year to Q2 2014.

Further declines forecast

The report suggests that Scottish firms do not anticipate things to improve in the immediate future, with respondents forecasting a further decline in the growth of key indicators over the next 12 months. Turnover growth is expected to drop from the 3.4% recorded over the past year to just 1% over the next 12 months.

ICAEW Scotland President, Andrew Hewett, said: “It is disappointing to once again see a drop in confidence amongst Scottish businesses, particularly when it takes us into negative territory. This is part of an ongoing decline in confidence in Scotland, which can perhaps be attributed to ongoing uncertainty.

“The aftermath of the referendum, the run up to the General Election, the forthcoming Holyrood elections and the possibility of an EU Referendum combine to mean that there is, potentially, an even deeper degree of uncertainty in Scotland than there is elsewhere in the UK, a feeling which is reflected in Scottish confidence levels.”

Grant Thornton UK’s managing partner in Scotland, Kevin Engel, added:  “This significant drop in confidence north of the border is naturally concerning, particularly given Scotland is the only part of the UK showing such a marked negative trend. The quarter examined covers the pre-election period, which could go some way to explain the downward shift in confidence.

“However, the Scottish business community is historically resilient. Now is the time for that tenacity in the face of challenging conditions to come to the fore to resist the potential dip in economic performance that may follow.”

Recruitment reigned in

 In keeping with Scotland’s negative confidence levels, companies have begun to scale back their hiring intentions. Increases in headcounts over the last 12 months, at 0.7%, were already well below the UK average of 2.2%.

Additionally, firms expect growth in hiring to decline further to just 0.3% over the next year. The outlook is particularly weak in the oil and gas industry in Scotland where jobs have been cut.

Public sector uncertainty

The public sector is a major employer in Scotland, accounting for around 23% of jobs. Given that the new UK Government plans cuts to public spending over the course of the next few financial years, a slowing of private sector job creation has the potential to impact dramatically on the Scottish labour market.

The weak employment outlook over the coming year is likely weighing on businesses’ expectations for domestic demand. Domestic sales growth is expected to fall to a rate of less than half that experienced over the past 12 months.

Emphasis shifts to development from recruitment 

Businesses’ attention seems to have begun to shift towards developing their existing staff as opposed to hiring employees. Unlike R&D budgets, which firms expect to cut, companies indicate that they plan to increase spending on staff development, with budgets rising by 2.3% over the next 12 months compared with just 0.4% over the past year despite expected weaker sales growth.

The plans are likely to be a reaction to the growing challenges businesses are facing from skills shortages in the labour market. The share of firms reporting that the availability of management and non-management skills is a greater challenge has grown from 16% a year ago to a little under 30%.

By increasing investment in their workforce now despite the difficult financial conditions, businesses hope to be better placed to capitalise on any improvement in market conditions in the future.

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