Brexit Amplifies Business Slowdown In Scottish Economy

20th April 2019

The latest SCC Quarterly Economic Indicator survey for Q1 of 2019 shows the health of the Scottish economy weakened considerably in the first quarter of this year. With the backdrop of an uncertain global economy and the cloud of Brexit hanging over the UK economy, key Scottish industrial sectors have experienced an investment slowdown as business costs and Brexit preparations take top priority.

The survey is produced by the Scottish Chambers of Commerce Network in collaboration with Strathclyde Business School's Fraser of Allander Institute. Key points included:

On Wage Increases: Every sector in the survey faced rising wage pressures with construction and retail reporting the biggest wage increases in over a dozen years.

On Investment: Investment performance is lower in every sector year on year except construction, while investment intentions remain restrained confirming a wait-and-see approach to spending.

On Business Confidence: The level of business optimism is lower across all sectors but retail compared to the previous quarter. Manufacturing has been particularly hit, as confidence dipped to the lowest level recorded for the sector since 2012.

Professor Graeme Roy, Director at the Fraser of Allander Institute, said, ‘'This latest Scottish Chambers of Commerce Quarterly Economic Indicator shows that Scottish businesses remain relatively resilient despite uncertain trading conditions. The lack of clarity about the UK's terms of exit from the EU continues to cast a shadow over day-to-day decision making, with businesses clearly struggling to make long-term plans in such times.

"Weak business investment has been a feature of recent times, and this latest survey shows that firms are becoming even more reluctant to make investment decisions at this present time. This is an unwelcome sign given the key role that investment plays in boosting productivity, and in turn improving long-term economic prosperity.

"With high rates of employment across the Scottish economy, the survey also identified that for many firms, pressure for pay increases remains on the up."

Commenting on the results, Tim Allan, Chairman of the Scottish Business Advisory Group and Director of Unicorn Property Group, said, "The prospect of a no-deal Brexit has undoubtedly taken a toll on business confidence in Scotland in the first quarter of 2019. Companies in Scotland are caught in a pincer movement of business challenges. On one hand, businesses are faced with increased cost pressures such as rising costs due to currency weakness and higher wages, and on the other they are hit by the dampening effects of political turmoil caused by the ongoing uncertainty of our future relationship with the EU.

"There is an immediate urgency to deal with Brexit, which is hampering our ability to compete on the international stage. We see this borne out in the decline in confidence, difficulties in recruitment and challenges in exporting. Furthermore, restraint on plans to invest will do nothing to solve Scotland's ongoing productivity challenge which require sustained levels of investment in skills and training if we are to see the shift the economy requires.

"Our survey has shown some real areas of robustness which highlights the resilience of Scottish businesses and their resolve to stay focused on creating jobs and paying taxes to fund vital public services. But the pressure on Scottish firms is rising, with the prospect of increased costs due to inflation, currency volatility, Brexit preparations and the prospect of increased taxation remaining as top concerns for all sectors."

On Wage Increases and Cost Pressures, Mr Allan continued, "Every sector in the survey faced rising wage pressures with construction and retail reporting the biggest wage increases in over a dozen years. Scottish employers are counting the cost of tightened labour markets as well as rises in pension contributions, the apprenticeship levy and National Minimum Wage.

"In addition, tourism, retail & wholesale and financial & business services experienced higher than expected additional overhead costs for the first quarter of the year, potentially as a result of having to plan for the risk of a no-deal Brexit."

Commenting on Investment he said, "Investment performance was lower in every sector year on year, with the exception of construction, which still experienced restrained levels of investment. Political turmoil has had a clear impact on the ability of businesses to invest in new staff, new equipment and expansion. If the recent uncertainty that has been hanging over businesses can be cleared, the economy is likely to benefit from a significant spike in new investment.

"Likewise, a stable domestic policy environment which prioritises skills development and a competitive non-domestic rates package would provide a clear signal of confidence to the private sector and unlock investment."

Of Business Confidence, Mr Allan commented, "Business confidence continues to be subdued, reflecting the difficult trading conditions for businesses, further exacerbated by Brexit uncertainty."

On Exporting and International Business, Mr Allan added, "The manufacturing industry experienced a continued decline in export orders, as an uncertain global economy and UK's prolonged negotiations with the European Union, start to impact on company order books. The tourism sector experienced a noticeable fall in the number of visitors coming from the European Union and the rest of the world, in comparison to the same numbers for Q1 2018. 'Staycations' from Scottish visitors remained the only positive visitor trend for the sector. Boosting levels of international trade is crucial for the Scottish economy and maintaining a business-friendly trading environment with the European Union will act as a critical enabler of Scotland's future exporting potential as well as our ability to attract investment and visitors to Scotland."

Key Findings

Construction sector

➢ The balance of firms reporting improved sales revenue rose one percentage point to +17%

➢ The balance of firms increasing capital investment rose in the quarter from -2% to 0, and investment in training from +7 to +21

➢ The percentage of firms looking to recruit rose from 47% to 68%. Of those, 42% had recruitment difficulties - up 12 points from the previous quarter

➢ The average pay increase rose to 10.3% from 5.0% in the previous quarter

➢ The sector appears fairly strong with firms expecting sales, investment and profits to rise in Q2.

Financial and business services

➢ Half of firms reported no change to business optimism with 29% reporting a rise and 23% reporting a fall. The net balance of +6% remains positive but has eased since Q4 2018 (+11%)

➢ The balance of firms reporting increased sales remained at +17%

➢ The balance of firms reporting rising investment fell 4 points from +9% to +5% ➢ A net balance of firms reported a rise in profits - the net balance of +15% is above average

➢ The percentage of firms seeking to recruit fell slightly to 70%. Of those, 36% had recruitment difficulties

➢ The outlook for the sector remains positive with sales, investment and employment all expected to rise in Q2 2019.

Manufacturing sector

➢ Business confidence remained in negative territory falling 2 points to -20%

➢ The balance of firms reporting increased export sales fell from +16% to +5%; export orders remained negative falling further from -14% to -20%. Rest of UK and export sales also remained negative

➢ The balance of firms reporting increased capital investment fell from +2% to -3%

➢ The percentage of firms looking to recruit rose from 68% to 77%. Of those, 47% had recruitment difficulties - broadly unchanged since the previous quarter

➢ Sales, investment and exports are all expected to fall in Q2.

Retail and wholesale

➢ Sales revenue trends largely unchanged. Rest of UK and export sales, on balance, declined. Online sales, although remaining positive saw a 19 percentage point fall compared to the previous quarter ➢ The balance of firms increasing capital investment fell in the quarter from +17% to +7%, and investment in training from +13% to +7% ➢ The percentage of firms looking to recruit rose slightly to 52%. Of those, 38% had recruitment difficulties – up from the previous quarter ➢ The average pay increase rose to 10.8% - highest level in 15 years ➢ The balance of firms confident that sales revenue will increase in the current quarter is rose to +25%.

Tourism

➢ Confidence declined during Q1 2019

➢ A balance of -32% reported a drop in sales revenue from rest of UK guests. A net balance of firms reported a fall in the number of guests/customers compared to the same period one year ago

➢ The balance of firms reporting rising capital investment fell into negative territory from 0 to -11%, and investment in training from +16% to -18%

➢ More than two thirds of firms are actively attempting to recruit staff and around half of these have reported recruitment difficulties

➢ The outlook for the tourism sector is fairly strong with sales and employment set to increase for a balance of firms. Investment on the other hand is expected to fall again.

A copy of the report can be downloaded from: https://www.scottishchambers.org.uk/press-policy/quarterly-economic-indicator