Business confidence in Scotland in negative territory for third successive quarter

David Bond

Business Confidence Index in Scotland is in negative territory for the third successive quarter, according to the latest ICAEW Business Confidence Monitor (BCM).

The Q2 Scottish score of -17.6 is marginally below the UK Q1 average score of -16.6, and down on Q2 2018 Scottish score of +10.6.
Whilst continued uncertainty surrounding Brexit is likely to have impacted upon confidence, a number of business challenges may also have contributed to the continued lack of confidence among businesses in Scotland. Regulatory requirements continue to be the most widespread issue, with 45 per cent of businesses reporting growing concerns this quarter.
Tax burdens are also a pressing concern for 19 per cent of businesses (the joint highest level of concern reported in the UK). This may partly reflect the Scottish Government’s indication that it is now willing to consider allowing local councils to introduce ‘tourist taxes’ – although to date, Edinburgh is the only city where councillors have officially voted in favour of it – and this will likely be introduced in the next few years once the Scottish Parliament has passed the legislation.
Business confidence may also be suffering from an easing of sales growth over the last 12 months. The expansions in both exports (3.6 per cent year-on-year) and domestic sales (2.7 per cent) are lower than a year ago. A slowdown is also apparent in sales volume growth, moderating from 5.8 per cent a year ago, to 3.0 per cent in Q2 2019.
Input price inflation remains unchanged in Q2 2019, at 1.6 per cent. Given little variation in cost rises, the slower increases in exports and domestic sales may help to explain a weakening in profits growth in the year to Q2 2019. Profits are up by 3.6 per cent this year, one percentage point less than a year ago.
Capital investment growth (1.9 per cent) is down when compared to a year ago (2.7 per cent). In contrast, Research & Development (R&D) spending (3.5 per cent), however, is rising at a rate well above the historical norm for Scotland, while staff development spending (1.3 per cent) is increasing at a similar rate to a year ago.
Over the next 12 months, businesses anticipate an improvement in domestic sales growth to 4.2 per cent year-on-year, they also forecast exports (3.4 per cent) and profits (3.2 per cent) growth easing slightly from their current rates. In terms of investment, businesses plan to marginally increase the pace of capital investment growth, but are set to be markedly more restrained over their increases in R&D spending.
ICAEW Scotland Director, David Bond said: “It is no real surprise that confidence in Scotland remains in negative territory and is down from where it was a year ago. This on-going pessimism amongst businesses – both in Scotland and across the UK as a whole – suggests that the uncertainty surrounding Brexit is something that businesses have very real worries about. This, combined with the concerns that many Scottish firms have surrounding tax burdens and other regulatory issues, makes for an environment where caution and, indeed, declining confidence is inevitable.”