Scottish economy falters as services sector slows down - BDO

The slowing services industry is taking its toll on the Scottish economy, according to the latest Business Trends Report by accountants and business advisers BDO.

The latest report shows that the slowing services sector is knocking the confidence of Scottish businesses, with both BDO’s Output Index and BDO’s Optimism Index falling for the past six consecutive months.

Indeed the Optimism Index has fallen from 104.9 in March last year to 99.4 this year which is a substantial fall.

BDO’s Output Index - which reflects companies’ experience of orders for the coming three months – has dropped from 101.7 in February to 101.3 in March this year.

While BDO’s Optimism Index – which predicts growth six months ahead – has fallen to 99.4. The index shows that business optimism is now underneath the long term trend and is at its lowest in more than two years.

The gloomy figures tally with the services sector output index which has now fallen for five months running, from 103.9 in November 2015 to 102.3 in March 2016. Recent figures1 have suggested that much of the caution is driven by firms feeling starved of investment, as uncertainty about the EU referendum is delaying spending decisions.

The picture looks worse for manufacturing. Its optimism sub-index now stands at 87.1, giving a strong indication that manufacturing firms’ order books will decline sharply in the next six months if nothing changes.

BDO’s Inflation Index offers some hope for manufacturers, rising 0.1 to 96.8 in March. However, as commodity prices stay low, the minor increase is unlikely to be enough to give a much-needed boost to struggling sectors such as the steel industry.

Commenting on the findings, Martin Gill head of BDO LLP in Scotland, said: “These figures show that political and economic uncertainty is affecting optimism among Scotland’s businesses. The EU referendum, the continued difficulties faced by the oil and gas sector, and the economic difficulties being faced in the Eurozone and China are all contributing to a mood of insecurity which is hitting investment and growth plans.

“Scotland’s slowing economy may be in need of additional support to protect its growth. Our latest figures echo those from the Scottish government which revealed growth of only 0.2% in the fourth quarter of last year which is clearly of great concern particularly as this is substantially lower than the rest of the UK.”

“Given that the UK government can currently borrow at rates never seen before there may be a benefit in investing in public infrastructure projects. Expansion in roads, house and rail building programmes could reignite the manufacturing sector and be a boost to the wider economy.”