Investment on hold
Scottish firms urge Bank to halt rate rises
Almost half of Scottish businesses believe that the Bank of England should resist further interest rate rises after cancelling or delaying investments because of uncertainty and the cost of borrowing.
The latest Addleshaw Goddard Scottish Business Monitor (SBM) found that 40% of firms had put their plans on hold in the second quarter.
The findings come as business sentiment drops slightly from a relative high in the Spring report, with most businesses experiencing a contraction in sales, turnover, investment, and export activity in Q2 of this year. Only employment figures increased on Q1.
Produced in partnership with the University of Strathclyde’s Fraser of Allander Institute, the report surveyed 400 firms across the economy. It said the low level of capital investment is a major concern.
National statistics show that business investment rates in Scotland are already lower than the UK overall, holding back productivity and economic growth.
Meanwhile, costs remain a significant issue for businesses, as they are for consumers. The report showed that 83% of firms in Scotland have seen their costs increase, with 71% experiencing increased costs of up to 50%.
Two-thirds of firms with increasing costs have avoided passing them on to their consumers, with construction, wholesale and retail, and manufacturing sectors absorbing the greatest proportion of rising costs.
However, half of surveyed businesses are either unable to absorb costs for any longer or are unsure how much longer they can absorb costs, though with the exception of wages, Scottish firms expect cost pressures to lessen in the second half of 2023.
David Anderson, partner and head of corporate at Addleshaw Goddard in Scotland, said: “It is clear there is still some way to go before we can return to sustained growth and the policymakers have a big role to play in the coming months.”
Professor Mairi Spowage, director of the Fraser of Allander Institute, said: “Despite the economy performing better than we expected last year, growth over the next few years is forecast to be fairly muted which is reflected in our latest business survey.
“Although inflationary pressures, particularly energy costs, continue to ease, a significant share of firms are putting off investments while they cope with a challenging economic landscape. This is particularly concerning when we look forward to the recovery and longer-term prosperity of the Scottish economy.”
- Despite business sentiment remaining positive overall, the share of firms expecting weak or very weak growth in the Scottish economy has increased from 62% to 71%.
- Inflationary pressures show continued signs of easing. The proportion of firms that expect to increase their prices by more than, or a lot more than normal, over the next 12 months dropped to 62% from 69% in 2023 Q1 and has been falling gradually from 88% in 2022 Q1.
- Supply chain issues appear to be improving for businesses in Scotland, with freight costs and availability and delays, lack of international supply, and administrative burden in trading with the EU all easing since last quarter.
- Labour supply issues persist, with 84% of firms with vacancies finding it difficult or very difficult to fill them which is slightly higher than last quarter. At the same time, a quarter of businesses report difficulties in retaining current staff – 3 percentage points higher than last quarter.
- Most businesses expect economic/ business uncertainty (83%), staff availability (77%), and political uncertainty (69%) to be important or very important over the next three months. The cost of energy (82%) and price of inputs (82%) are the biggest cost concerns for businesses.
- Just over half (52%) of firms reported energy bills as their key cost driver over the past three months (down from 65% last quarter) and 42% of firms expect energy costs to continue to be a key cost pressure in the coming six months (down from 54% last quarter). Total employee costs and wages have remained the most common cost pressure for businesses both in the previous three months and in the coming six months.