Scotland’s mid-market company managers remain optimistic about their growth opportunities despite warnings of recession and cost rises.

Grant Thornton’s Business Outlook Tracker reveals a rise in optimism (up 12 percentage points since October) as well as profit (up 28pp) and revenue (up 40pp) expectations.

The findings from a poll taken in early December are in marked contrast to last week’s gloomy warnings from Scottish Chambers of Commerce which was criticised on social media for being too negative and not reflecting many business experiences.

Grant Thornton said its results indicate that businesses are confident they can weather this economic downturn. Optimism on their funding position has risen 40pp since October. More than half (54%) are also confident that they have sufficient working capital to manage the impact of a recession for six months or more. 

One continuing problem is attracting and retaining talent, with 48% of respondents experiencing unusually high attrition rates. Half are also struggling to recruit for open roles. 

Grant Thornton says employers are pulling out all the stops in a bid to remain competitive. Over three quarters of respondents (78%) are planning to offer their people a pay rise in line with, or above, inflation, while 82% are also reviewing their employee benefits package to make it more competitive. Just under a third (28%) are also planning to invest more in skills development over the next six months. 

The research also finds that the mid-market is starting to look for ways to reduce its reliance on people. Almost three quarters (74%) agree that they are increasing their use of automation and digital. 

Stuart Preston, partner at Grant Thornton UK, said: “It is surprising that the levels of positivity in the mid-market are at odds with the current forecasts from the Bank of England and the government.  

“We assumed that a likely recession would lead to a more fluid labour market and we still expect unemployment to increase in 2023 and 2024 to more normal levels.

“This should start to ease the pressure off salaries and turn the balance of power back towards employers. Anecdotally, we are already starting to see signs of this, with more employers asking their people to come into the office more frequently. 

“But with the UK in the midst of numerous strikes around pay and working conditions, how far these demands are met could have a knock-on effect for the mid-market and place further salary growth pressures on employers. 

“That said, having seen first-hand how Scotland was able to respond to the challenges of recent years, with resilience, determination, flexibility, enterprise and innovation, there is a high probability that many businesses in our region will find a way to survive and thrive during the months ahead and this optimism will likely increase as we progress through 2023.” 

Surveys have offered conflicting evidence on the state of the economy and business prospects. Scottish Chambers of Commerce last week posted a dire picture of falling cashflow and profits, delayed investment decisions, firms raising prices and struggling to recruit and retain staff.

While these factors may be familiar to most firms, some argue that they represent a period of belt-tightening rather than meltdown. Surveys from Lloyds Bank and Scottish Engineering have been more positive, referencing a rise in orders and a more positive outlook. The Bank of England believes inflation has peaked.

Economists are also at loggerheads, with EY and JP Morgan offering differing views on whether the recession will be deep or mild.

PMI readings lower but pressures easing

A fall in orders last month, as measured by the S&P Global/CIPS purchasing managers’ index, suggests underlying business conditions remain tough for both manufacturing and service sector firms.

The decline was entirely driven by a weaker services PMI which fell to 48.0 from 49.9 in December. However, manufacturing activity, while still contracting in January, declined at a slower pace, with the PMI rising to 46.7 from 45.3 last month.

However, optimism among firms picked up to the strongest degree since last May, reflecting hopes of an improvement in global economic conditions and a further slowdown in cost pressures, said Martin Beck, chief economic adviser to the EY Item Club. 

“Indeed, January’s survey added to signs that these pressures are already easing, indicating a further slowdown in cost and output price inflation.”

CBI reports mixed conditions

Cost and pricing pressures in UK manufacturing remain high, but shows signs of easing, according to the CBI’s latest Industrial Trends survey.

In the quarter to January, average unit costs grew at the slowest pace since April 2021, while domestic selling price inflation was the slowest since July 2021. But both remained far above their long-run averages. 

Manufacturers reported stable output volumes in the quarter to January, following a modest decline in the quarter to December.

New orders were flat, while the volume of total order books fell further below normal, suggesting that output has been supported in part by manufacturers tackling backlogs of work.

Looking ahead, manufacturers expect new orders and output volumes to increase in the next quarter, but the share of firms reporting that orders or sales would constrain output nonetheless reached its highest since April 2021.

Anna Leach, CBI deputy chief economist, said: “Mixed conditions are apparent in the manufacturing sector this month. Global supply chain pressures, labour shortages and energy costs are easing, enabling unit cost growth to ease back from record highs. 

“But there are signs that demand is easing too, with order books weakening sharply, spare capacity in the manufacturing sector rising and the share of firms citing the strength of sales or orders as potential constraint on output rising to its highest in almost two years.”

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Comment: Cheer up, resilience will save us from the gloom