Cost pressures rise to highest levels in seven years for Scottish businesses

Weakening sterling and the current global growth acceleration has helped fuel the country’s economy during the first half of 2018, creating strong pickup in overseas businesses for Scotland’s exporters.

According to the findings of the latest Royal Bank of Scotland Business Monitor, conducted by the Fraser of Allander Institute, the majority of companies across the country have experienced a pick up in activity during the last three months, with more expected during the remainder of the year.

But cost pressures are having a significant impact with nearly two thirds of all firms reporting an increase in costs during the second quarter of 2018.

The survey of more than 400 Scottish businesses reveals that more than one in four (23 per cent) enjoyed an increase in export activity in the three months to June compared to one in six (16 per cent) reporting a decline. The balance of seven per cent compares with 12 per cent over Q3 2017 and is a significant change to the five per cent fall in 2018.

The production sector led the way during Q2 with a net 11 per cent reporting an increase in export activity.

All businesses are optimistic that the trend will continue, with a net 11% expecting export activity to rise over the next six months.

The Monitor reveals that more than a third (35 per cent) of firms reported an increase in the total volume of business during the last quarter, compared to 29 per cent who witnessed a fall in activity. The balance of 7 per cent represents a rise of six points since Q1 of this year.

Growth was strongest in transport and communication with a quarter (24 per cent) reporting an increase. Manufacturing and finance and business services both enjoyed a net increase of 14 per cent.

Tourism fell flat in Q2 (net -3 per cent) but is the most optimistic about the rest of the year with a net third (33 per cent) expecting growth during the remainder of 2018.

Fewer firms reported growth in the East of Scotland (net +2 per cent) than the West (+16 per cent).

Amongst exporters, 23 per cent saw growth whilst 16 per cent said sales fell. The balance, +7 per cent, contrasts with Q1’s fall of -5 per cent. In general, producers (+11 per cent) were seeing better sales to other countries than services firms (+4 per cent). However, expectations for further growth are only +11 per cent.

New business continued on an upward trend enjoyed since 2016. A net nine per cent stated that the volume of new business rose in the three months to June. This builds on the eight per cent reported in Q1 and the 13 per cent reported in Q4 2017.

New business volumes grew across all regions of Scotland, most strongly in West Central Scotland (33 per cent) and in East Central Scotland (26 per cent). Southern Scotland was weakest with a net six per cent of those surveyed reporting that new business volume has grown. This compares to 20 per cent in the North East and 16.2 per cent in the Highlands and Islands. Of all those surveyed, 34 per cent expect new business volumes to increase in the next six months.

In terms of repeat business rose in the three months to June, 18 per cent reported an increase, while 18 per cent reported a fall. The majority, 64 per cent, reported that repeat business remained flat during Q2. Of those surveyed, 20 per cent expect a rise in repeat business during H2, compared to 11.5 per cent who expect a fall.

Inflationary pressures continue to rise. Of those surveyed, 62 per cent reported that costs rose in the three months to June. Just one in 25 (4 per cent) of firms report that costs fell. The balance, +57 per cent, compares with +54 per cent in Q1 2018.

Cost pressures are being felt slightly more strongly in services (+63 per cent) than in production industries (+50 per cent). Tourism (+82 per cent) and distribution (+70 per cent) report the highest pressures. These figures are now as high as seven years ago.

More firms reported falling capital investment (28 per cent) than rising expenditure. The net balance (-6 per cent) is very close to results from the last 18 months.

Businesses employing more than 100 people are reporting rising capital expenditure (net balance of +17 per cent) whilst smaller firms employing fewer than 20 people are likely to be investing less than they did previously (net balance of -15 per cent).

Sebastian Burnside, chief economist with Royal Bank of Scotland, said: “It’s very welcome news that Scottish businesses are reporting growth so far in 2018 and appear confident that they can maintain that momentum into the second half of the year.

“But keeping an eye out for efficiencies is as important now as it ever has been with such a wide range of sectors reporting rising cost pressures.

“Consumers have already had their incomes squeezed by higher inflation, so their ability to take much more pain is limited. Firms will have to work hard to stop rising costs eating into their margins.”

Professor Graeme Roy from Fraser of Allander, added: This latest Scottish Business Monitor supports our cautious optimism about the outlook for Scotland’s growth prospects this year; the findings are consistent with our view that the Scottish economy will pick up through 2018, although growth is still expected to remain below trend.

“The pick-up in business activity and exports is welcome. However, the declining investment trend in the survey suggests that the current uncertain environment is impacting on firms’ investment plans and is making business planning difficult.”