Major survey indicates improving Scottish business sentiment, but outlook remains challenging.
30th July 2020
From Fraser of Allender Institute - Authors James Black, Graeme Roy and Mairi Spowage.
Business activity expected to rise from a record low
Capacity of Scottish businesses likely to be constrained for the short to medium term
Majority of businesses plan some redundancies as the Job Retention Scheme is removed. 55% expect to cut workforce as the furlough scheme winds down
As lockdown restrictions begin to ease and the economy starts to open back up, sentiment amongst the Scottish business community is showing some tentative signs of improvement. However, the overall outlook remains challenging, according to a major survey of Scottish companies.
The Addleshaw Goddard Scottish Business Monitor, produced in partnership with the Fraser of Allander Institute, indicates that while day-to-day business activity remains substantially below normal levels, the volume of overall business activity anticipated for the next six months is expected to recover ‘significantly'.
Overall, business sentiment around operational capacity, day-to-day activity, employment and debt levels, is expected to depend largely on a combination of how the virus is contained over the coming months and how Scottish policy reacts.
The detailed results from the Scottish Business Monitor, drawn from over 500 Scottish-based businesses' survey responses between 30th June and 14th July, indicate:
When compared to normal levels for the next six months, the average firm expects to operate at 51-75% capacity. Yet, one in every four firms expects to operate at normal or above-normal capacity.
Business activity is expected to rise from a record low, with a net balance of 70% of firms reporting a decrease in the first quarter of 2020 to 4% as we look ahead to the next six months.
Looking at employment and capital investment, whilst expectation indicators remain negative there has been some notable recovery. Expectations for employment over the next six months have increased from -57% to -21%, with capital investment recording an increase from -68% to -21%.
Turning to the Job Retention Scheme, which will be phased out over the coming months, the majority of firms say they plan to make redundancies once the furlough support comes to an end. Of those who used the scheme, 12% expect a large decrease in employees and 43% a small decrease. More positively, 41% say they expect no change.
61% of businesses said that their cash flow position was secure or very secure for the next six months - leaving a significant proportion of firms at risk.
Many businesses have significantly increased their debt to get through the lockdown period, with 47% of firms saying their burden has increased as a result of the pandemic. Of those who have witnessed an increase, 41% have seen this burden increase by a large amount, 46% by a moderate amount and 13% by a small amount.
Commenting on the findings, Graeme Roy, Director of the Fraser of Allander Institute, said:
"As we continue to emerge from the public health crisis, the economic costs of the lockdown are becoming ever clearer. This summer's activity figures were the lowest since the survey began in 1998. And whilst we find a marked improvement in business sentiment for the next six months, the finds are highly polarized with just as many firms expecting a further fall in activity as those expecting an increase.
"Around half of all firms in the survey intend to only operate at less than 75% of normal capacity over the next six months. As a result, and as the government Job Retention Scheme (JRS) comes to an end, a similar proportion of firms - around 50% - who have used the JRS are planning to decrease staffing levels.
"In short, whilst the economic recovery has clearly started, it will be a long road ahead."
David Kirchin, Head of Scotland at Addleshaw Goddard, said:
"There is no doubt the economic outlook for the foreseeable future looks testing and, while activity levels are now improving, they remain challenged.
"However, there is encouragement to be found in the survey data. Nearly half of companies say they expect no change to their workforces and 61% of companies described their cashflow position as secure or very secure for the next six months. The survey also confirms that companies have been able to access debt. For others, our recent experience tells us that potential investors have a healthy appetite to seek out opportunities with innovative businesses, as companies have been able to obtain new equity capital in these last few months, whether by a private raise or by turning to the public markets."
About the Scottish Business Monitor
Launched in 1998 - and now in its 22nd year - the Scottish Business Monitor is one of Scotland's preeminent trackers of business sentiment and activity.
Compiled by the Fraser of Allander Institute - an independent economics research institute at the University of Strathclyde - the Business Monitor compiled responses from over 500 businesses across Scotland between 30th of June to 14th July 2020 - and from a range of sectors - on issues such as business activity, investment, employment prospects and turnover/costs.
The Scottish Business Monitor is published weeks in advance of official growth data on the Scottish economy. It also provides a detailed assessment of sentiment in the business community, including investment and recruitment intentions.
See the article on Fraser of Allender web site