Sharp fall in Scottish hiring intentions suggests productivity set to rise - BDO

The latest report reveals that the Employment Index, which tracks firms’ intentions to hire in the coming six months, has dropped from 104.8 to 102.2 (the equivalent year-on-year figure was 112.0 in April 2015).

While still above the long term trend, the latest result is the biggest monthly drop in the growth of employment since the aftermath of the financial crisis.

Firms in Scotland appear to be increasingly shunning new hires as the National Living Wage makes employment more expensive. Some firms may also be holding off until uncertainty about future membership of the EU is resolved.

BDO’s Output Index - which reflects companies’ experience of orders for the coming three months – is at 100.6 down from 101.3 in March and down from 104.3 in April last year. BDO’s Optimism Index has risen marginally in April to 99.5 from 99.4 in March but it is down considerably from 104.7 in April 2015. However, BDO’s Optimism sub index for the services sector – which predicts growth six months ahead – remains particularly buoyant at 101.8. The continuing growth in the face of employment slowing suggests that the UK could finally be seeing an uptick in its productivity.

Commenting on the findings, Martin Gill, Scottish head of BDO LLP, said: “While there have been concerns about productivity across the UK compared to our international competitors the situation is worse in Scotland. According to the latest update on Scottish GDP published in the Quarterly National Accounts Scotland bulletin our economy has grown in cash terms by just 4 per cent since the 2008 recession compared with an increase of nearly 23 per cent across the UK as a whole.

“As well as some long term issues with the Scottish economy there are also signs that the downturn in oil and gas is having a direct impact on GDP. In the last quarter of 2015 Scottish GDP rose by just 0.2 per cent compared to a 1 per cent quarterly rise for the same period in the previous year.

“With year on year output and optimism figures both considerably down and inflation concerns increasing it is only logical that businesses are considering their employment policies. When employment was cheaper many firms simply hired staff when outputs increased. This has led to the lower productivity figures for Scotland and the rest of the UK. What is clear is that our productivity ultimately determines how much we earn and Scotland and, indeed, the rest of the UK’s performance in this area have been verging on the disastrous since the recession. Figures earlier this year showed that output per hour across the UK is now 21 per cent below the average of our G7 partners.

“Our figures this month on hiring intentions suggest that Scottish businesses are concerned about the direction the economy is travelling in and are starting to look harder at whether recruiting new staff is always the right answer. While this trend will slow the growth of the workforce in Scotland, it could signal the start of a move toward a higher investment, higher productivity economy. In the long run, this would help us generate higher living standards and more interesting jobs for Scottish workers.”