Investment held back amid interest rate concerns
Investment decisions are being put on hold amid ongoing concerns over interest rates, according to new research from the Scottish Chambers of Commerce.
While more firms continue to increase investment than cut it, over half (55%) have reported no changes, which is a five-year survey high.
While recruitment difficulties have broadly stabilised for firms, they are still significant and labour continues to be the leading source of cost pressures as a result of wage settlements and pressures.
Fewer firms (48%) are indicating that they will raise prices this quarter compared to 55% in the last quarter.
Stephen Leckie, president of the Chambers, said: “Whilst business confidence is starting to pick up from the low levels of 2022, this renewed optimism is not translating into sustained performance and output from firms necessary to get our economy firing again.
“Looking ahead, we would urge the Bank of England to provide clarity on the future direction of interest rates or begin to allow time for the lag between rate hikes and the full effect on spending to be fully observed, so that there is less risk of causing unnecessary economic damage.
“Pro-business measures are urgently needed. For example, reinstating the reduction in VAT for hospitality and tourism, putting in place a five-year rolling guarantee on the full expensing tax allowance, and removing the 10% tax hike on Scotch Whisky now in effect as announced in the Spring Budget.”
This survey was conducted between 21 August and 18 September and 380 firms responded. Since then the governor of the Bank has said that inflation will fall significantly next month.
The Bank and the US Federal Reserve both kept interest rates unchanged at their last meetings, and analysts say it would be no shock if the European Central Bank did the same at its meeting on Thursday.
AJ Bell analysts say markets expect one more quarter-point hike to 4.75% from the Frankfurt-based ECB by the year end but that is expected to be the high for this rate-hiking cycle in the EU.
Rate hikes are slowing around the world and Felix Feather, European economic analyst at abrdn says: “The absence of any upside surprises to the underlying inflation data since the last monetary policy meeting of the ECB’s Governing Council makes a surprise move unlikely. We therefore expect a hold.”
Any comments on the future trajectory of interest rates will also be important, as that might help to set the scene for the US Federal Reserve and the Bank of England on 1 and 2 November respectively.
Markets are currently putting a 94% chance on no change from the Fed (at 5.5%) and an 83% probability of no change from the Bank of England (at 5.25%) at these meetings and the expectation is that there will be a maximum of one more hike from both before they pause for good.
The Fed’s first rate cut is currently pencilled in for July 2024 and the Bank of England’s for November 2024.