Scottish firms experience growth in overall business but investment declines further - RBS/ Fraser of Allander Institute

A survey of more than 400 Scottish businesses has revealed that over 40 per cent of firms experienced rising turnover in the three months to September.

The latest Royal Bank of Scotland Business Monitor, conducted by the Fraser of Allander Institute at the University of Strathclyde, found that fewer than a quarter reported that turnover fell.

The balance, +20 per cent, compares with +7 per cent in the final previous quarter.

Scottish companies reported a sharp acceleration in growth of overall business and predict a further acceleration of this expansion during the current quarter. However, the survey also highlights a further decline in capital investment.

Overall, the latest Scottish Business Monitor – for Q3 2018 – highlights an improving picture with an uplift in optimism. In particular, the latest results for new and repeat business continue to grow.

A net 16 per cent of Scottish companies noted an increase in total business volumes in the third quarter, the strongest rate of increase since the fourth quarter of 2014 and a net balance of 18% forecast an increase in business volumes in the current quarter. In the first and second quarters, respective balances of 1 per cent and 7 per cent of Scottish companies reported increases in business volumes. Once again firms in west of Scotland perform more strongly than the east.

A net 36 per cent of companies in the finance and business services sector reported growth in the third quarter making it the strongest performing sector.

A net balance of 26 per cent of transport and communications firms and a net 25 per cent of construction firms reported growth. The weakest performing sector was tourism with a net balance of only 11 per cent reporting expansion and only a net 4 per cent are forecasting future growth.

Investment declined for a net 11 per cent of respondents, the steepest fall since the second quarter of 2016 and a net balance of 8 per cent expect a fall in capital expenditure in the current quarter.

The survey shows cost pressures for firms continue to intensify and remain high by recent standards. Over the last two years, we find that firms are reporting a much higher trend in costs (+55 per cent) as opposed to turnover (+20 per cent). Based on past experience, this is consistent with weak demand across the Scottish economy with business managers more worried about costs rather than opportunities.

The survey also reveals that staff availability remains a pressing issue for most firms with over 75 per cent saying that it was an important or very important issue. In contrast, credit availability continues to be much less of an issue – either as a result of more accessible credit from banks or weak demand amongst business owners.

Graeme Roy, director of the Fraser of Allander Institute, said: “This survey is further evidence that Scottish businesses remain resilient against a backdrop of heightened uncertainty. After a challenging couple of years, the Scottish economy has returned to sustained – but fragile – growth. Over the first six months of 2018, growth in Scotland was faster than for the UK as a whole. Securing a smooth Brexit transition is therefore crucial to maintaining these hard-fought gains.”

He added: “The Scottish Business Monitor provides a timely update on the state of the Scottish economy and the environment that businesses are operating in. With ongoing uncertainty, it is vital that business prepare for the future and continue to focus upon the elements of future profitability and success that they can control such as investing in innovation, workplace innovation, training and development and product development.”