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New report on SMEs

Scottish start-ups hit by ongoing uncertainty over Brexit

Warning: Mark Hart

The number of new start-ups in Scotland fell sharply last year and established firms scaled back their growth ambitions due to Brexit uncertainty, according to new data looking at the health of the grassroots economy.

The findings have emerged from the Enterprise Research Centre’s UK Local Growth Dashboard report, an annual publication that looks at a range of metrics charting the growth of small to medium-sized enterprises (SMEs), which account for 99% of all firms in the UK.

It found that in 2018 – the most recent period available in the ONS’ Business Structure Database – the number of new start-ups in Scotland fell by nearly 2,000, representing a decline of 10.9% on the previous year (from 17,959 to 16,001).

Across the UK as a whole, the equivalent figure was almost 42,000, a decline of 12.9% (from 325,900 to 284,000). But in some parts of the country the fall was much sharper. In south western Scotland – an area covering Greater Glasgow and authorities to the south and west – the fall was 13.6%.

Even greater drops were seen in other parts of the UK: In Northern Ireland as a whole the figure was 15% lower than in 2017. Meanwhile in England, Swindon and Wiltshire saw the biggest absolute drop – with 45% fewer start-ups established. Just three areas saw an increase in start-ups – the North of Northern Ireland (+2.6%), Liverpool (+2.8%) and Worcestershire (+9.2%).

Today’s research said the slowdown in new firm creation reflected the uncertainty around Brexit, and warned that the ongoing lack of clarity was also blunting growth ambitions in more established firms.

Other key findings for Scotland from the UK Local Growth Dashboard report show that a total of 16,001 new firms were started in 2018, while the three-year survival rate for start-ups stood at 52.9%, slightly below the UK average figure of 55.1%. Start-up survival rates since 2015 were generally higher in the South of England and Northern Ireland.

The report also said that among scale-ups, just 1.6% of new Scottish firms managed to grow their turnover to £1 million or more within three years between 2015-18. The UK average was 2.0%, with the highest proportion in the North of Nothern Ireland (4.6%). For established Scottish firms with a turnover between £1m and £2m, 5.5% managed to grow above the £3m mark over three years. This was below the UK average of 7.4%.

Findings also showed that the proportion of Scottish firms that succeeded in growing their productivity, with turnover increasing faster than headcount, slipped slightly to 7.3% in 2015-18, below the UK average of 8.3%. Northern Ireland saw the highest proportion of firms growing productivity, followed by London, Cambridge and major city-regions in the north of England including Manchester, Leeds and Sheffield.

Mark Hart, ERC deputy director and professor of small business and entrepreneurship at Aston Business School, said: “The latest Local Growth Dashboard analysis shows some clear warning signs about the health of the private sector economy right across the UK.

“It’s particularly worrying that we’re seeing an absolute decline in the number of new businesses being started in the wake of the 2016 referendum and this is a trend we’re also observing in the data for Scotland.

“Budding entrepreneurs are clearly holding their breath waiting for some clarity about the outcome of Brexit, but if the trend continues we’ll see fewer jobs created by dynamic young firms.

“And while established firms are clearly still growing successfully in many parts of the country, it’s frustrating that productivity growth still seems to elude the vast majority.

“Taken together, it seems hard to avoid the conclusion that Brexit uncertainty is causing the grassroots economy to stutter. This may not yet have fed through to employment numbers but policymakers need to be aware of the warning signs and create the certainty businesses are craving.”

UPDATE 10 Sept: A report from CYBG is significantly more encouraging for the sector. The bank’s SME Health Check Index  score has fallen again over the second quarter of the year and is now at an all-time low.

However, Scotland bucked the trend, rising by 6.1 points to 41.9 in Q2, largely recovering the losses recorded in the first quarter of the year. This increase is the second highest in the UK, behind only the South West of England.

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