Optimism returning to Scottish economy - RBS

Slowdown in the Scottish economy appears to be coming to an end and optimism is returning, according to the Royal Bank of Scotland.

Companies across the country are expecting to see an increase in business volumes, sales and repeat business during the next six months.

Despite expected falls in new business and continued concerns about the North East’s oil and gas sector, businesses expect to see a rise in exports by the end of 2016.

The findings are contained within the latest Royal Bank of Scotland Business Monitor, conducted by the Fraser of Allander Institute at the University of Strathclyde.

The survey of 500 Scottish businesses reveals that almost a third (31 per cent) firms reported that the total volume of business fell during the last quarter, compared to 30 per cent who witnessed an increase in activity. However, the balance, -1 per cent, represents an improvement of 18 points since Q1 2016.

The performance of financial and businesses services was especially strong, with more than one in five (22 per cent) reporting an increase in total volume. The production sector reported a net five per cent fall in total business volumes.

A net 12% of firms expect business volumes to rise in the six months to November.

In repeat business, the same number of respondents (19 per cent) reported that they had experiences rises and falls. Tourism proved strongest, with a net one in seven (14 per cent) enjoying an increase in repeat trade.

A net 18% of firms expect to see a rise in repeat business for the remainder of 2016.

A third (32 per cent) of firms said that turnover fell during the last quarter, compared to 31 per cent who experienced an increase. The balance, -1 per cent, compares with -21 per cent for the first quarter of the year. Turnover was strongest within the central belt, where a net four per cent of business reported sales growth, this compares to a net one in ten (11 per cent) businesses across Scotland reporting a fall.

In total a net 13 per cent of firms expect sales to grow over the next quarter. Within services, that figure stands at 16%.

Exports have proved challenging for all businesses with the exports balance proving negative for the fifth consecutive quarter.

Just one in five firms (19 per cent) stated that export activity rose, while one in four (26 per cent) saw it fall. This balance, -7 per cent, is an improvement of -22 per cent for the first quarter of 2016. The balance was slightly lower in production (-10 per cent) than in services (-5 per cent). Despite this, a net 1 per cent of firms expect export activity to rise in the six months to November.

However there is still some cause for concern in some areas.

While one in three (35 per cent) of businesses enjoyed an increase in the volume of new business – with construction (net 30 per cent) and financial services (net 29 per cent) proving strongest, regions with a strong association with oil and gas and agriculture, struggled. Both the North East and the Highlands and Islands reported no increase in new business volumes.

A net one in five (18 per cent) expect new business volumes to rise over the second half of the year.

More than four in ten (44 per cent) firms experienced a rise in costs over the last three months.

Cost pressures were especially strong in tourism, with a net 63 per cent of firms reporting a rise, perhaps reflecting the higher National Living Wage.

A net 41 per cent of firms expect costs to increase over the course of the year.

Stephen Boyle, chief economist with the Royal Bank of Scotland, said: “These results are encouraging. After a difficult period, growth looks set to resume, albeit modestly. Despite the continued drag from export markets and the oil and gas sector, the underlying strengths of Scotland’s economy are re-asserting themselves.”

Malcolm Buchanan, chairman of the Royal Bank of Scotland’s Scottish Board, said: “The findings of the Royal Bank of Scotland Business Monitor offer grounds for optimism.

“The feedback suggests positive, if modest, confidence levels are returning to the Scottish business community, something we hear regularly from our customers.

“But we cannot be complacent. The disparity between sectors and even regions shows that we must do everything that we can to help businesses succeed and offer the support required to make sure any improvement has longevity.

“Customers in the North East are still struggling with the downturn in the oil and gas sector and we must continue to work with them to find solutions. We also need to build for the future, and through our work with programmes such as Entrepreneurial Spark and Business in the Community Scotland we can maximise opportunities for Scottish business in the long term.”

Professor Graeme Roy, director of the Fraser of Allander Institute, added: “The latest Royal Bank of Scotland Business Monitor report contains some grounds for cautious optimism with many of the key benchmark indicators improving.

“However, uncertainty appears to be having an impact on some business activities - perhaps most notably capital investment which could have implications for long-term growth. The services sector continues to outperform manufacturing.

“Overall the performance of the Scottish economy since 2015 has been relatively fragile, although this report confirms that growth is likely to return and build momentum through the 2nd half of 2016.”