Scottish business community seeing ‘reasons for optimism’ but there’s a sting in the tail

Releasing its latest growth tracker report, Royal Bank of Scotland also noted that expectations for the coming year had strengthened.

Despite those upbeat findings, the survey’s main tracker - a seasonally adjusted index that measures the month-on-month change in the combined output of Scotland’s manufacturing and service sectors - slipped back below the neutral threshold of 50 in September, recording a reading of 49.2 from 50.3 in August and signalling a slight decrease in activity. Private sector output has now fallen in two of the last three survey periods.

Economic uncertainty, weakening demand conditions and financial constraints were reasons mentioned by firms for the latest easing in output.

Judith Cruickshank, chair of the Scotland board at Royal Bank of Scotland, said: “September’s regional growth tracker offers signs of optimism and examples of Scottish firms taking a proactive approach to the challenges businesses across the UK are currently facing.

“Payroll numbers in Scotland were expanded for the first time in four months and, despite intensifying cost pressures, businesses here opted to raise their charges only marginally. In fact, the rate of increase was the slowest observed since the early stages of the Covid-19 pandemic five years ago.

“Nonetheless, this positivity remains restricted mostly to services and Scottish firms are still experiencing rising cost pressures and challenges driven by weak demand conditions, prompting some to lower their charges.”

Scottish private sector firms recorded a fall in new business in September, thereby extending the current run of contraction to 12 months. That rate of decrease was described as “solid” and the fastest since March. Weakening underlying demand trends and economic uncertainty were said to have led to the latest decrease.

New business also fell at the UK-level, following an expansion in the prior month. However, the pace of decrease in the UK as a whole was much softer than that observed for Scotland, RBS added.

Despite the drop in new orders, Scottish companies remained “strongly optimistic” about output growth prospects for the coming year, linked to plans to improve operational performance, introduce products and commence new projects. The level of confidence strengthened to a three-month high, although it remained below the long-run and UK-wide averages.

Of the 12 monitored regions and nations, Scotland saw the strongest uptick in staffing numbers. Northern Ireland was the only other area where growth was observed, while declines were posted everywhere else.

Firms north of the Border continued to highlight spare capacity in September as new orders fell at a faster pace. Backlogged work decreased solidly, with the rate of depletion remaining largely unchanged from the previous month. The fall in outstanding business in Scotland was weaker than the UK average.

Input prices rose rapidly across Scotland’s private sector during September. The pace of inflation was elevated by historical standards, the bank noted, with the latest increase being the most pronounced in five months and outpacing the UK-wide average. Surveyed panellists noted that higher labour costs, driven by increased national insurance contributions, promotions and efforts to retain staff, were central to rising costs.

However, output prices charged for Scottish goods and services rose only fractionally last month. The rate of charge inflation was in fact the slowest in the current 59-month sequence of inflation, and the weakest of the 12 monitored regions and nations.

While some firms chose to pass higher costs on to their clients, a “competitive environment” and weak demand conditions prompted some businesses to instead lower their charges.

The tracker comes after a study last week suggested that the percentage of Scottish small business owners predicting growth had fallen for the fourth consecutive quarter to a new five-year low.

Lender Novuna Business Finance said its latest business barometer showed that small business growth forecasts in Scotland have fallen in consecutive quarters since the start of the year.

The findings also revealed a rise in the percentage of Scottish small business owners that fear contraction or collapse in the next three months, to 24 per cent, from 17 per cent at the start of the year. Added to this, 91 per cent of business owners say they fear the possibility of autumn Budget announcements that could negatively impact their growth outlook and finances.

Uncertainty

Jo Morris, head of insight at Novuna Business Finance, said: “Whilst Scottish small business growth forecasts are down this year, the underlying concern is the ongoing slide over consecutive quarters.

“The value of our decade-long tracking research indicates that developments in 2025 are significant: this spring, the percentage predicting growth dropped below 30 per cent for the first time in years and, since then, it has continued to fall.

“There are various factors at play. Market uncertainty is something small businesses do not like, US tariffs have been a cause of concern through 2025 and, for many small businesses, the long tail of Brexit still impacts business confidence - with fewer small businesses today looking to open up trading opportunities in EU markets. The looming autumn Budget is also a concern for many, as there has been a lot of speculation about possible tax rises.

“The message from Scottish small business owners seems to be very clear: they need a context of certainty to plan against and a tax framework that incentivises growth, expansion and investing in new staff.”