David Bond

Sentiment tracked by ICAEW’s Business Confidence Monitor (BCM) for Q3 2024, which surveys business leaders, put confidence at 14.2 on the index, down from 15.4 in the previous quarter but well above its historical average.

Scottish businesses reported that domestic sales grew in Q3 for the first time in 18 months, climbing above their historical average but below the rate seen in the UK as a whole.

Although businesses expect further growth over the coming year, forecasts suggest this would still be one of the slowest rates in the UK. However, the anticipated rise in domestic sales in the energy and water sector should support growth, given the high proportion of these businesses in Scotland, the BCM found, although the nation is underrepresented in other sectors experiencing a pick-up in sales growth.

Regulatory requirements remained the most widespread challenge faced by Scottish businesses in Q3, however the proportion of businesses citing them as a problem dropped from a historical high of 62% in the previous quarter to 34%.

Exports growth declined year-on-year, with a challenging outlook among manufacturing and engineering and energy and water firms likely weighing on expectations. Scottish firms forecast the slowest exports growth in the year in the next 12 months.

Scottish businesses reported the sharpest rise in input price inflation in the UK, though firms expect a significant easing over the next year, with only Yorkshire and the Humber expecting lower growth. The modest inflation forecast is likely related to low expectations in the country’s energy and water sector.

The combination of high input price inflation and weak exports hindered profit growth, ICAEW said. Profit expansion in the year to Q3 was notably lower than the historical norm at 2.6%, and while an uplift in Scotland’s profit growth is expected in the coming year, the predicted rise is still below the UK average.

Meanwhile, the number of companies citing concern about infrastructure problems is higher in Scotland than the rest of the UK, with the proportion of businesses reporting the issue double the historical average. The increased concern could link to Ofcom evidence that 33% of commercial premises in Scotland have full-fibre broadband connectivity, compared to the UK average of 40%.

To boost confidence, the Westminster government should use the upcoming Budget as an opportunity to conduct an urgent review of the UK’s tax system and introduce reforms to stimulate economic growth, build confidence and drive investment, ICAEW said.

David Bond, ICAEW Director, Scotland, said: “Although confidence is slightly down quarter on quarter, it’s pleasing to see that overall sentiment remains high among businesses in Scotland.

“Stubbornly-high input price inflation and weaker exports have had an impact on sentiment, though it is notable that the number of firms troubled by regulatory requirements has fallen significantly.

“As speculation in Westminster continues ahead of what is likely to be a difficult Budget, we are calling on the Chancellor to provide the certainty and stability that companies need. Reforms to VAT, alongside public and private investment - could help to achieve this.”

Scottish businesses increased their selling prices at a faster rate than anywhere else in the UK, but more modest price rises are forecast in the next year.

In the labour market, employment growth in Scotland only picked up slightly in Q3 to 1.7%, just above the country’s historical average of 1.2%. Salaries grew at the same rate as the previous quarter and marginally exceeded the national average, though businesses forecast that employment growth will slow. [5]

Scottish companies increased capital investment spending from quarter on quarter, which represents the second-highest rise in the UK, behind only London. Although this growth is expected to moderate over the next year, it will still remain above   the UK average, with only the South West predicting a larger increase. [6]

In contrast, businesses in Scotland reduced their R&D budgets in the year to Q3 2024, with the country the only part of the UK where R&D budgets decreased. This represents the first drop in budgets since Q3 2021. While growth is expected to return over the coming year, the rate of increase will be less than half of the country’s historical average. [7]

In the UK overall, business confidence fell for the first time in a year to 14.4 on the index. The fall was likely driven by mounting concerns over the tax burden and weaker exports growth, while investment remained low, ICAEW said.