Scottish business prepares for fastest spell of growth in four years – RBS/Fraser of Allander

Scottish business is bracing itself for its fastest period of growth in nearly four years, according to the latest Royal Bank of Scotland Business Monitor, conducted by the Fraser of Allander Institute at the University of Strathclyde.

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

But inflationary pressures are leading to rising costs for the majority of companies, with more than half of companies expecting costs to rise further during the next six months.

The survey of nearly 400 Scottish businesses reveals that more than one in four (28 per cent) enjoyed an increase in export activity in the three months to December compared to one in five (20 per cent) reporting a decline. The balance of 13 per cent compares with 12 per cent over Q3 2017 and is the strongest increase since 2014.

The services sector led the way during Q4 with a net 17 per cent reporting an increase in export activity (six per cent in Q3).

Businesses are optimistic that the trend will continue, with a net 24 per cent expecting export activity to rise over the next six months.

The Monitor reveals that more than a third (37 per cent) of firms reported an increase in the total volume of business during the last quarter, compared to 27 per cent who witnessed a fall in activity. The balance of 10 per cent represents a rise of one point on Q3 2017.

A net 11 per cent per cent of production sector firms reported a rise in activity following a four per cent rise reported in Q3 2017.

The rise was most prominent in manufacturing (18 per cent). A balance of ten per cent of services businesses reported rising business volumes, with above average growth in finance and business services (19 per cent).

Growth was strongest in the Highlands & Islands (19 per cent) and weakest in the North East (1 per cent). This shift in the North East is still an improvement in a reported fall of -4 per cent during Q3 2017.

Collectively, a net 13 per cent of all firms surveyed said they expected total business volumes to rise in the six months. If these expectations are realised the first half of the year will see the strongest growth since late 2014 when the falling oil price began to bite. Optimism was strongest in the finance and business services sector (24 per cent) and manufacturing (20 per cent). Firms in all parts of the country expect business volumes to grow including the North East (18 per cent).

New business continued on the upward trend enjoyed since 2016. A third (33 per cent) stated that the volume of new business rose in the three months to December, compared to one in five (20 per cent) who stated it fell. The balance of 13 per cent compares with the 12 per cent reported in Q3 2017.

New business volumes grew across all regions of Scotland, most strongly in East Central Scotland (29%) and in the Highlands and Islands (15 per cent). A net 16 per cent of firms expect new business volumes to increase in the six months to June, with the expected increase applying across most parts of the country, with the exception of the Highlands and Islands (-6 per cent). Firms in transport and communication (37 per cent) and tourism (16 per cent) have the largest balances expecting a further rise in new business volumes.

The volume of repeat business rose in the three months to December in comparison to a broadly flat Q3. While 21 per cent reported an increase, 12 per cent reported a fall. The net balance (9 per cent) compares to one per cent in Q3 and two per cent during Q2 2017.

Over a third (36 per cent) of firms reported a rise in turnover on the three months to December. This compares to a quarter (26 per cent) who experienced a decrease.

The balance, 10 per cent, compares to 13% during Q3 and five per cent in Q2. Turnover growth was strongest in the Highlands and Islands for the second quarter in succession (21 per cent in Q4 and 26 per cent in Q3) and sales rose in all regions including the North East (3 per cent).

Inflationary pressures are continuing to impact upon costs for Scottish business, with 59 per cent of all businesses stating that costs rose over the last quarter. This is consistent with the 58 per cent recorded in Q3. Just one in 20 (5 per cent) reported a fall. Cost pressures were most acute in tourism where a net 81 per cent reporting a rise in costs, followed by distribution (63 per cent) and construction (52 per cent).

High balances in production (56 per cent) and services (50 per cent) suggest a continuing broad-based rise in costs.

More than half (56 per cent) of all firms expect costs to increase in the next six months, suggesting businesses are concerned that inflationary pressures will continue to build.

Capital investment continues to fall. One in five (20 per cent) firms reported that new capital investment rose in the three months to December. One in four (25 per cent) firms reported that capital investment fell. The balance, -5 per cent, follows -8 per cent reported in Q3, -5 per cent reported in Q2 and -8 per cent reported in Q1. All contrast markedly with +24 per cent in Q4 2016.

Stephen Boyle, chief economist with Royal Bank of Scotland, said: “Christmas appears to have come early for Scotland’s economy. The three months to mid-December delivered the fastest growth of the year. However, that pace of growth remains modest by the standards of the past.

“If businesses’ expectations are realised growth in the first six months of 2018 will sprout to its fastest pace in four years. At least in part, that gift comes courtesy of an improvement in export performance as firms benefit from sterling’s fall and Europe’s growth.

“This latest report does suggest that the North East’s oil-related downturn has passed. The only weak spot in this improved outlook for the economy is capital investment with firms reporting that it fell again in the last three months.

“As we ring out the old and ring in the new, inflationary pressures remain elevated and consumers’ wallets and purses will find it tough going once the seasonal sales have passed.”

Professor Graeme Roy, Director of the Fraser of Allander Institute, added: “After a challenging 2017, the final Scottish Business Monitor for the year suggests that firms in Scotland are continuing to remain resilient with both turnover and the volume of activity remaining positive.

“Exporting firms continue to take advantage of the competitive pound but levels of business investment remain disappointing. With the Scottish Fiscal Commission forecasting a weak outlook for productivity in the years ahead, turning around levels of investment in our economy will be vital for long-term economic prosperity.”