SCOTTISH BUSINESS REMAINS OPTIMISTIC DESPITE GROWTH GRINDING TO A HALT IN 2018
Scottish business growth has stalled during the first three months of 2018 with new figures revealing that the country has experienced the weakest volume of business in two years. Most regions across Scotland have seen no increase in growth during the first quarter of the year, with the exception of the East Central areas, boosted by the financial services sector. But despite such negativity, companies remains optimistic, with the majority of firms preparing for a strong rebound over the course of the next six months.
The findings are contained within the latest Royal Bank of Scotland Business Monitor, conducted by the Fraser of Allander Institute.
The survey of more than 400 Scottish businesses reveal that a third (32%) of firms said turnover rose in the three months to March. Thirty two per cent reported that turnover fell. The balance, +0%, compares with +10% in the final quarter of 2017. Firms in production industries report a modest rise in turnover (+3%) while a small balance of service firms report that sales fell (-2%).
Turnover grew in East Central Scotland (+12%) but was sluggish or negative elsewhere. In total, 16% of firms expect sales to grow in the six months to September, with a stronger rebound in services (+20%) than in production (+8%).
One in six (16%) of exporters reported that export activity rose in the three months to March, with one in five (21%) reporting a decline. The balance, -5%, compares with +13% in Q4 2017 and is the first decline since late 2016. Exports declined in both services (-5%) and production (-7%). However 7% of firms expect export activity to rise in the six months to September.
New business continued on the upward trend enjoyed since 2016. Almost a third (30%) stated that the volume of new business rose in the three months to March, compared to one in five (22%) who stated it fell. The balance of eight per cent compares with 13 per cent reported in Q4 2017 and 12 per cent reported in Q3 2017.
New business volumes grew across all regions of Scotland, most strongly in East Central Scotland (17%) and in the Highlands and Islands (15%). A net 13% of firms expect new business volumes to increase in the six months to September, with the expected increase applying across most parts of the country. Firms in transport and communication (32%) and tourism (32%) have the largest balances expecting a further rise in new business volumes.
The volume of repeat business rose in the three months to March. While 20% of firms reported that the volume of repeat business increased, 15% reported that it fell. The balance, +5%, compares with +9% in Q4 2017.
A net +7% of services firms reported rising repeat business while in the production sector a net +3% said that repeat business rose. Growth was strongest among firms in financial and business services (+17%). Repeat business grew in East Central Scotland (+14%) and the Highlands and Islands (+8%) but was very low or negative elsewhere.
On balance, firms expect repeat business volumes to rise in the six months to September (+8%), in all parts of the country and strongest in transport and communication (+35%) and tourism (+23%).
Inflationary pressures reported last year continue to affect businesses. For the first three months of 2018, 59% of firms report that costs rose. Just one in 25 firms (4%) report that costs fell. The balance, +55%, is almost identical to the 54% reported in Q4 2017. The high balances in both services (+56%) and production (+54%) suggest a continuing, broad-based rise in costs.
Cost pressures were especially strong in tourism (+65%), distribution (+63%), and construction (+60%).
One in five (20%) firms reported that new capital investment rose in the three months to March and more than one in four (27%) that capital investment fell. The balance, -7% compares with -5% in Q4 2017, suggesting a further weakening in investment activity.
The balances were weak in both the production (-15%) and services (-4%) sectors. There were marked falls among firms in financial and business services (-18%) and manufacturing (-14%) while investment increased among a balance of tourism firms (+26%).
A net +7% of firms expects capital investment to fall in the six months to September.
Commenting on the figures, Sebastian Burnside, chief economist with Royal Bank of Scotland, said: "Scottish businesses are eagerly anticipating an end to the squeeze on household finances.
"Inflation was still eating away at people's pay packets in the first quarter of this year, leading to businesses reporting stable revenues. But looking forward there's confidence that demand will pick up as price pressures start to ease."
Professor Graeme Roy, Director of the Fraser of Allander Institute, added: "Following a challenging 2017, this first Scottish Business Monitor of the year shows that the Scottish economy continues to face challenging trading conditions.
"Firms in the survey reported a slowdown in some key trends but businesses expect many of these trends to pick up during the remainder of 2018. For example, the survey finds that export activity unexpectedly fell, however on balance firms expect export activity to grow over the coming 6 months.
"Meanwhile planned investment activity - something which is key to long term economic growth - remains stubbornly low and firms don't expect this to improve in the immediate period ahead."