Why Scottish business confidence is at an 18-month high

Royal Bank of Scotland’s latest growth tracker also paints an optimistic picture for the months ahead, with confidence levels hitting an 18-month high. The report’s headline business activity index was unchanged at 52.7 in August, matching July’s reading, though anything above 50 denotes growth. Expansions in activity across Scotland have now been noted in each month this year, with growth remaining skewed towards service providers, RBS noted. In contrast, the manufacturing sector suffered a downturn in output.

Across the private sector as a whole - accounting for about half of the economy - there was “sustained and solid growth in activity” midway through the third quarter, according to the August tracker.

Expectations for the year ahead continued to strengthen and the degree of confidence was found to be the highest in one-and-a-half years and historically strong. Firms expect that market conditions and a “lax borrowing climate” will support growth in the year ahead.

Judith Cruickshank, chair of the Scotland board at Royal Bank of Scotland, said: “The Scottish private sector continued to expand on the back of solid growth in activity observed across its service firms. Meanwhile, the manufacturing sector remained suppressed as deteriorating underlying demand trends continued to weigh down on production.

“While the service sector has been pivotal in supporting growth in private sector activity since the start of the year, there were some signs of cooling demand during August. Growth in new orders softened, and services employment also ticked up at a softer pace. That said, firms remain optimistic that growth in business activity will be sustained in the coming 12 months. Meanwhile, business expenses increased at one of the weakest paces since February 2021.”

Of the 12 monitored English nations and regions, only the West Midlands recorded a softer uptick in new business than Scotland. Compared to the UK-wide trend, growth forecasts across Scotland remained subdued.

North of the Border, job creation was driven by an uptick at service providers where improving demand trends encouraged the intake of additional staff. Manufacturers, meanwhile, continued to pare back their payroll numbers. Excluding the West Midlands and East Midlands, where contractions were again noted, Scotland registered the softest rise in workforce numbers of the remaining monitored UK regions and nations.

Firms based in Scotland managed to reduce their work backlogs during August, the report added. Extra staffing capacity at service providers and falling new order intake at manufacturers underpinned the latest downtick. The rate of depletion was weaker than that seen in July and matched that observed for the UK as a whole.

The August data also pointed to a rapid rise - one that surpassed the UK-wide average - in business expenses across the Scottish private sector. Higher commodity prices and wages, the latter especially stemming from the service sector, was said to have pushed up cost burdens. That said, the respective seasonally adjusted index slipped back below the long-run average and was the second lowest reading in three-and-a-half years.

However, the rate of charge inflation trended above the historical average, with Scottish companies raising their selling prices at a stronger pace. Firms often attributed higher charges to growing underlying cost burdens. Compared to the UK as a whole, charges levied for Scottish goods and services rose at a slightly weaker pace.

Sebastian Burnside, chief economist at RBS parent NatWest, said: “Alongside broad-based growth in business activity, it was encouraging to see price pressures ease in most areas, in what will be very welcome news for the Bank of England's policymakers.”

The tracker’s generally upbeat findings contrast with another recent key business snapshot. The Scottish Chambers of Commerce’s latest quarterly economic indicator showed that business investment had flatlined in recent months. Growth was found to be positive but “significantly subdued”.

It found that labour costs were the biggest cost pressure and driver of price rises, cited by three-quarters of all firms surveyed. Interest rates were the second largest concern behind inflation, impacting 40 per cent of all businesses, according to July’s findings.

Due to pressures in the housing market, construction firms reported the largest contraction in housebuilding contracts since the second quarter of 2020, during the initial Covid lockdown. The economic indicator is regarded as Scotland’s longest-running business survey, operating since 1990, and 95 per cent of respondents to the survey were smaller companies with less than 250 employees.

Stephen Leckie, president of the Scottish Chambers of Commerce, said: “The survey results highlight that persistent economic uncertainty is forcing firms to put investment decisions on hold, which makes prospects for medium and long-term growth far more challenging.

“The flatlining performance across the business community must act as a wake-up call to governments north and south of the Border. Governments must work with us if we are to revive investment decisions and maintain our competitiveness as a business destination.”

A separate report last month from the Federation of Small Businesses (FSB) showed confidence falling back into negative territory in the second quarter of this year, losing the ground made up by the first quarter’s “welcome return” to positive sentiment among Britain’s smaller firms. For the second quarter of 2024, the headline confidence reading tumbled to -10.8 points, a fall of 16.3 points from the previous quarter’s +5.5.

According to the poll of more than 1,100 small business owners and sole traders across the UK, reported revenues over the second quarter were more or less in line with the previous three months.