Scottish business optimism and output in Scotland at three year low - BDO

The firm said that while some of this can be put down to the uncertainty surrounding the EU referendum vote, the figures have been in decline for a year indicating more deep rooted problems with the economy.

Business output - which reflects companies’ experience of orders for the three months ahead – now sits at 99.0 which is down from 104.1 in June 2015. Business optimism – which predicts growth six months ahead – fell to 98.9 and was at 103.9 for the same period last year. UK Manufacturing continues to have the gloomiest outlook, with its optimism sub-index slumping to 83.8.

Uncertainty has also contributed to the continuing slowing rate of job creation. BDO’s Employment Index – which indicates firms’ intentions to hire – has now dropped to 101.4 from 109.1 a year ago and is currently at a two year low.

Martin Gill, Scottish head of BDO LLP, said: “There is little doubt that uncertainty prompted by Brexit has resulted in disrupted investment in the Scottish economy, but the signs of a slowdown were already showing ahead of the decision. The latest output and optimism figures are down considerably on June 2015 when the EU referendum wasn’t even on the agenda.”

“The issue for business, therefore, is that the Scottish, and UK, economies were already facing difficulties even without the Brexit vote. These difficulties have, in all likelihood, been compounded by the vote leaving the economy in a very fragile state indeed. Of course negativity breeds negativity and businesses need to keep their heads and understand that while the situation at the moment in unclear, they are unlikely to notice any difference in their day to day operations for some considerable time to come. “

“Indeed many will be surprised at how little has changed in the short to medium term and beyond that nobody knows quite what direction is to be taken. That doesn’t mean that businesses shouldn’t plan for the worst but hope for the best but there is a degree of hysteria being generated at present which, ultimately, is unhelpful.“

“Continued investment is essential as is growth if the Scottish economy is to come through this relatively unscathed. We are at a crucial moment where we must be sensible in protecting the UK economy. We need a plan of action now that gives businesses the added confidence to progress with investment plans. This should be a combination of central government investment to support potentially vulnerable sectors such as manufacturing; the encouragement of private funding perhaps through further tax incentives; and growth plans to maintain market share and employment levels. It will be a complex balancing act but sense dictates that we must act in the next few months and years to help Scotland thrive and grow.”

June survey data pointed to a slight return to growth in Scotland’s private sector following two months of stagnation. Driving the expansion was a slight rise in new business intakes, the third time this has been reported in as many months. However, total employment fell further amid another decline of outstanding business.

BDO’s findings contrasted slightly with the Bank of Scotland seasonally adjusted headline Purchasing Managers’ Index - a single-figure measure of the month-on-month change in combined manufacturing and services output - which rose slightly to 50.5 in June, rebounding after posting 49.9 in May. The latest figure signalled a slight upturn in Scotland’s private sector, only the second time this has been the case during 2016 so far.

New business levels expanded for the third successive month during June. However, the rate of growth eased since May and was only slight. The rise in total new work was broad-based across both manufacturers and service providers. Price discounting was cited by Scottish goods producers as one of the main factors behind the increase in new orders during the month.

The BoS said Scotland’s private sector firms continued to reduce their payroll numbers in June, extending the current trend of job reductions to seven successive months.

However, the rate of reduction was only slight and softened to the joint-weakest in the aforementioned period. Although manufacturers added to their employee numbers, service providers reduced their headcounts further.

Input prices faced by private sector companies operating in Scotland rose further in June. According to anecdotal evidence, the rise in input costs reflected unfavourable exchange rate movements throughout the month.

Meanwhile, firms lowered their output prices for the fourth time in the first half of 2016, however the rate of decline was only marginal.

Graham Blair, Regional Director, SME Banking Scotland said: “After two months of broadly stable business conditions, Scotland’s private sector experienced a slight upturn in June. Growth occurred at a slow pace, after a solid rise in manufacturing production was weighed down by an under-performing service sector. Regardless of this, June’s survey data was the strongest so far in 2016, which will be encouraging news for Scottish firms.”