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SCC Quarterly Economic Indicator – Q1 2023 Press Release

SIGNS OF HOPE FOR SCOTTISH BUSINESS BUT COST PRESSURES AND INFLATIONARY CONCERNS CONTINUE TO HAMPER PROSPECTS

The latest findings from a leading Scottish business survey by the Scottish Chambers of Commerce (SCC), confirm that the beginning of 2023 provided welcome respite for some sectors of the economy more so than others, after a difficult end to 2022.
However, this comes from a very weak base, and while confidence has generally increased, this is yet to translate into an overall improvement of business conditions. Most Scottish SMEs still report no improvement to sales, cashflow, and investment.
The survey also indicates that many businesses are still struggling in the face of rising cost pressures and high inflation, as well as continuing to face challenges regarding access to the labour market.

SCC QEI Q1 2023 – Report

KEY FINDINGS:

INFLATION CONCERNS PERSIST: Concern over inflation remains high among all firms and has seen little movement over the quarter, with still around eight in 10 firms (82%) reporting increased concern from it. On a sectoral level, financial and business services was the only sector surveyed where a lower number of firms reported less than at least eight in 10 at 77%.

COST PRESSURES REMAIN HIGH:
–  75% reported increased cost pressures from energy costs
–  70% reported increased cost pressures from labour costs, including salaries
– 55% reported increased cost pressures from fuels such as diesel and petrol
– 50% reported increased cost pressures from raw material prices

CASHFLOW & PROFIT CHALLENGES: On balance, more firms reported a fall (43%) in cashflow than an increase (31%), reflecting the difficulties faced by notably the retail and tourism sectors. Across the entire survey, the manufacturing sector was the only sector to report growth for cashflow and not a contraction. Similarly, the services sector was the only sector to report growth in profits.

LESS FIRMS PLANNING TO RAISE PRICES: The number of firms indicating that they intend to raise prices in the next quarter has fallen slightly compared to the previous quarter. This remains high with still over seven in 10 firms (73%) stating that they will raise prices in Q2 2023.

CAUTIOUS LABOUR MARKET: Recruitment difficulties have seen a slight drop of five percentage points, from being reported by 52% of firms in Q4 to 47% for this quarter. Over half of all firms (57%) reported no staff changes over the quarter, with 57% again saying that they do not expect staff changes to change in Q2 2023.

Stephen Leckie, President of the Scottish Chambers of Commerce said:
“The beginning of 2023 has seen improvement in the prospects of some sectors of the Scottish economy, in line with recent economic data that has been more positive than previously expected.

“While we see the construction, services and manufacturing sectors reporting better results, we must note that this comes from a very low bar set by the past few years of constant and seemingly never-ending challenges for business. We also see the retail and tourism industries continuing to struggle in the face of these headwinds.

“The survey also indicates that many of the big challenges that faced firms in 2022 are continuing to persist in 2023. Cost pressures continue to rise alongside concern from energy bills, inflation, labour shortages, alongside growing uncertainty in the global economy.

“There is a large in-tray of issues for the new First Minister and his cabinet to work with businesses to address, to help put the Scottish economy back onto a path towards unlocking growth and investment.

“We are ready to work with government to bring care and focus onto these pressing challenges for the economy, that must come with agile and decisive action that supports firms through the uncertainty ahead.”

On business regulation, Stephen Leckie said:
“One of the most consistent themes in the survey results is the high number of firms antidotally highlighting increased concern from current and or future regulatory burdens.

“These include the deposit return scheme; short-term lets; alcohol advertising; tourism visitor levy; rent controls; to name but a few, and that’s why we pressed all the SNP leader candidates in their leadership contest to commit to reducing business regulation which is adding to the cost of doing business in Scotland.

“We also call once again for an immediate wholesale review of the out-of-date business rates system to be actioned, alongside ensuring that Scottish firms receive rates reliefs on par with their counterparts in the rest of the UK.

“The new First Minister has welcomingly committed to introducing a small business impact assessment at the development stage of future policymaking, but we would urge that these assessments are also carried out for existing or imminent regulations.

“Businesses will be looking for action on regulation very soon and we will hold the FM’s pledge of an ‘open door’ for business to account.”

On energy bills, Stephen Leckie said:
“While support for energy bills has helped business concerns and costs to an extent, there is still three-quarters of Scottish firms telling that this is still a problem and not going away any time soon.

“The painful reality for many is that energy support from the UK government has now been scaled down and businesses will now soon see their standing charges shoot through the roof, which could be the final straw for many.

“As the support for households is also scaled back, there is also concern over the impact this may have on consumer spending as priority is given to covering additional energy costs. The UK Government should reconsider how it intends to support both firms and households in need throughout the year until wholesale prices have sufficiently cooled.”

On inflation and price rises, Stephen Leckie said:
“High concern from firms over inflation has been a regular theme of the survey for some time now, the recent surprise jump in UK inflation up to 10.4% will have undoubtedly set off some nerves in the business community.

“Businesses continue to tell us of the pressure that such consistently high inflation is having on their decisions and the critical bottom line. This is evidenced in the higher number of firms that intend to raise their prices in the next quarter. While this figure has eased since the last quarter, it’s likely to increase unless inflationary pressures can be sufficiently cooled, as borrowing and input costs continue to be squeezed by rising interest rates.

“It comes down to the decisions of UK monetary policymakers, to consider the growing impact of increasing interest rates weighing down on demand versus stimulating consumer demand and investment in the economy.”

On the labour market, Stephen Leckie said:
“While the headline employment figures remain strong, Scottish businesses continue to face difficulties accessing the people they need in a tight labour market, compounded by economic inactivity rates still heavily influenced by the impacts of the COVID-19 pandemic.
“This will continue to hamper and hold back our aims for boosting growth and productivity if we do not see action from government both at Holyrood and Westminster.

“Both governments have a role to play in helping people back into work post COVID-19 but have yet to find the policy measures needed to really shift the dial on that pool of people, who left the workforce over the course of the pandemic due to ill health, mental health, or took early retirement.

“Looking further afield, we welcome that the Migration Advisory Committee are currently conducting a review of the Shortage Occupation List. We look forward to contributing to its review and we ask that recommendations from it are immediately actioned as soon as possible.”

Commenting on the results, Professor Mairi Spowage, Director at the University of Strathclyde’s Fraser of Allander Institute, said:
“The outlook for the UK economy published by the Office for Budget Responsibility (OBR) which accompanied the Spring Budget was significantly more positive than in November. Given the uncertainty, and in particular, given the rise in energy bills households and businesses will experience from April, it feels a little premature to be celebrating that the UK has dodged a recession.

“Whilst it may indeed be true that a technical recession will be avoided, it is still going to feel like a difficult time for the economy – with even the optimistic OBR thinking there will be a contraction in growth over 2023.

“So, the overall feeling in the economy seems to be that things are not as bad as we feared a few months ago, but that the bar was pretty low. All of this is shown in the survey results today, with firms a bit more positive about the outlook for business, but much more negative about investment intentions.

“This is concerning for the medium to long-term capacity of our economy to grow. The increasing uncertainty in the economy at the moment is unlikely to provide the environment to incentivise the investment that the economy needs.”

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