The SME Health Check Index, published by CYBG in partnership with the Centre for Economics and Business Research (Cebr), rose by six points in Q2 2019 in Scotland, driven largely by a bounce-back in the confidence and capacity indicators following their fall to historic lows in the previous quarter.

However, the banking group and think tank warned there was still cause for concern, with the annual rate of employment growth in Scotland among the lowest in the UK at 0.6%, while the annual rate of business creation fell by 0.2 percentage points to 3.9% in Q2.

For the UK as a whole, the Index fell by 6.9 points to 41.9 in Q2 2019, as economic and political uncertainty – largely linked to Brexit – continued to weigh on business confidence. The study overall, however, reveals a mixed picture, with continued resilience in the labour market and encouraging insights on business diversity.

The reduction in the headline figure across the UK was driven by falls across the majority of indicators comprising the Index, including the first quarterly contraction in GDP in Q2 since the final quarter of 2012, as well as declines in capacity, lending and net business creation measures. There was more positive news for employment, with the relevant indicator rising by five points, as SMEs continued to hire. Employment reached 32.8 million in Q2, 114,000 higher than in Q1 and 425,000 higher than in Q2 2018.

Although the unemployment rate in Scotland has ticked up (from 3.2% in Q1 to 3.6% in Q2 2019), it remains below the UK average. The strength of the labour market in Scotland has been key to the performance of the local economy. Low unemployment also has fiscal implications: the latest data show that Scotland’s onshore tax revenues (excluding those from North Sea oil) rose by £3 billion to £62.7 billion in the 2018/19 financial year – which is a positive indicator for levels of activity in the local economy.

In a special report this quarter, the Health Check Index also examined how the complexity and diversity of UK SMEs enhances their ability to deal with ongoing political and economic uncertainty.

The report suggest that businesses in Scotland are exposed to potential disruptions in their relationships with key suppliers. This is particularly the case in Glasgow, where SMEs on average indicated that they would need over a month to replace their most important supplier or sub-contractor. Meanwhile, less than 8% of SMEs surveyed in Scotland operate in multiple regions, with this share falling to just 3% among those based in Edinburgh.

However, Scottish SMEs in the survey achieve higher than average scores for the product and customer diversity indicators, and the level of workforce diversity in Scotland is surpassed only in London and the West Midlands. Across Scotland as a whole, ONS data show that 49% of those in employment are women, reflecting both a higher than average employment rate among women of 73%, as well as a lower than average employment rate among men. The large share of women that Scottish SMEs employ appears to have been a key factor facilitating the overall growth in employment in recent years.

Gavin Opperman, group customer banking director at CYBG, said: “The health of Scotland’s SMEs is pivotal to the success of our wider economy, and the picture painted by the results this quarter was mixed. We saw an increase of six points in the headline index to 41.9 in Q2 2019, despite businesses being tested by heightened uncertainty, moderating economic growth globally and rising costs.

“On the surface things may look a little gloomy across the UK, cause for optimism can be found. The overall labour market has remained resilient, with SMEs continuing to hire, and wages continuing to grow, despite the tougher conditions. Further, an analysis of workforce composition, customer base and supplier relationships has revealed some encouraging insights on SME diversity across many parts of the country, indicating a good ability to handle sudden change or shocks.

“Here at CYBG we are committed to helping SMEs prosper and grow. We are optimistic that with a careful strategy and access to adequate support, businesses have the resilience to weather the storm.”