Brexit impact evident in survey
Confidence ebbs as small firms face rising costs
The impact of sterling’s decline and the departure of EU nationals over Brexit fears are impacting on prospects, according to the Federation of Small Businesses (FSB).
The FSB’s Scottish Small Business Confidence Index fell in the last three months to -15.2 points, from -3.8 points in the previous quarter, while the UK figure fell even more steeply, dropping 13.9 points to 1 point.
Profit margins are also being squeezed, indicating that companies are trying to avoid passing on the rising cost of imported materials and are instead taking a hit to their bottom line.
FSB Scottish policy convener Andy Willox said: “Businesses in Scotland have been pessimistic about prospects for the last seven quarters.
“While we saw a slight uptick earlier this year, this quarter business confidence in Scotland, and across the UK, has taken a hit.
“Rising inflationary pressure and a weakening domestic economy are the twin drivers of plummeting confidence among UK businesses.”
Mr Willox urged the Chancellor not to impose any tax impediments on business and said the Scottish government had helped by introducing improved relief to encourage investment which was still rising despite the cautionary outlook.
“Scottish small firms will be looking to the Chancellor to extend a lifeline in the Budget,” he said.
“In such a difficult trading environment, new tax grabs and loss of reliefs for entrepreneurs will exacerbate existing challenges.”
An increased share of firms now warn input costs – such as the cost of raw materials – are a barrier to business growth, according to the survey.
Mr Willox said: “The depreciation of sterling is still having a big impact on those firms which import goods or services, or who are part of international supply chains.”
A net balance of 7% of small businesses in Scotland plan to increase their investment in the next quarter, against 6% earlier in the year.
“The Scottish Government has done the right thing by heeding FSB’s call for an investment rates relief,” said Mr Willox.
“Giving growing firms time to recoup their money before being hit with a bigger bill will go some way to helping Scottish investment intentions catch up with those south of the border.”
Official figures published last week showed that unemployment in Scotland had fallen to just 3.8%. FSB in Scotland is arguing that these figures reinforce the case for measures to cushion the impact of Brexit on Scottish businesses.
Mr Willox added: “It is critical that agreement with the EU27 is now reached on issues such as the length and nature of a transitional deal.
“We would argue that a three year interim period would be sensible, alongside a comprehensive Free Trade Agreement. Further, EU citizens working in or running businesses in Scotland must have the right to remain in the country.”
SNP MSP Mairi Gougeon, who sits on Holyrood’s Europe Committee, said: “The damage of a Tory hard Brexit isn’t just something to worry about in the future – it is something that is causing damage to our economy in the here and now.”
The University of Strathclyde’s Fraser of Allander Institute said uncertainty over the Brexit negotiations could act as a “long-term brake” on economic recovery.
Analysts said growth “remains fragile and well below trend” and while employment is at a record high, household budgets are being squeezed by rising inflation eroding take-home pay.
The institute’s latest commentary said that while Scotland’s economy returned to growth in the first quarter of 2017, the improvement was on the back of “an exceptionally weak” last two years.
Director Graeme Roy said: “The latest leading indicators suggest the economy continues to recover, albeit at a relatively fragile pace.
“We believe Brexit has the potential to act as a long-term brake on Scotland’s growth potential and, to date, very little progress seems to have been made by the UK Government in its negotiations with the EU.”
“One area the UK government could provide greater clarity on is over the specific powers they envisage being transferred to the Scottish Parliament post-Brexit. This would help enable preparatory discussions between business and the devolved administration.
“On balance our forecasts are based upon the assumption that a constructive deal between the UK and the EU is reached. Should this not occur, outcomes towards the lower-end of our forecast ranges are more likely.”