Export growth rates hit three year high but cost pressures build for Scottish business

A weak pound buoyed Scotland’s production and tourism sectors, boosting visitor numbers to the country and supporting exports – leading to the strongest export growth rates in three years.

Companies across the country have reported improved growth in Q3 2017, with construction performing well and financial and business services and tourism enjoying above average growth.

The balance of companies enjoyed increases in turnover and new business.

But inflationary pressures are leading to rising costs for the majority of companies, with capital investment continuing the downward trend which begun at the beginning of 2017.

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 reveals that more one in three (33 per cent) enjoyed an increase in export activity in the three months to September compared to one in five (21 per cent) reporting a decline. The balance of 12 per cent compares with nine per cent over Q2 2017 and is the strongest increase in the three years.

The production sector continues to lead the way with a net 22% reporting an increase in exports during Q3 (21 per cent in Q2). A net six per cent of services firms reported higher exports.

Businesses are optimistic that the trend will continue, with a net six per cent expecting export activity to rise over the next six months.

The Monitor reveals that more than a third (36 per cent) of firms reported an increase in the total volume of business during the last quarter, compared to 27 per cent who witnessed a fall in activity. The balance of nine per cent represents a rise of three points since the second quarter of 2017 and six points since Q1 2017.

A net four per cent of production sector firms reported a rise in activity and this compares to a net one per cent decline reported in Q2 2017. The rise was most prominent in construction (10 per cent), a rise of 14 point since Q2 2017. A balance of ten per cent of services businesses reported rising business volumes, with above average growth in finance and business services (15 per cent) and tourism (29 per cent).

Growth was strongest in the Highlands & Islands (22 per cent) but fell in the North East (-4 per cent).

Collectively, a net 8 per cent of all firms surveyed said they expected total business volumes to rise in the six months. Firms in all parts of the country expect business volumes to grow. However, despite a net 12 per cent of business in the North East expecting businesses to rise when surveyed in Q2, a net five per cent of businesses in the region expect growth to decline until March 2018.

New business continued on the upward trend enjoyed since 2016. A third (35 per cent) stated that the volume of new business rose in the three months to September, compared to one in five (22 per cent) who stated it fell. The balance of 12 per cent is an improvement of three points on Q2 2017.

New business volumes grew across all regions of Scotland, most strongly in East Central Scotland (19 per cent) and in the Highlands and Islands (16 per cent). A net 12 per cent of firms expect new business volumes to increase in the six months to March, with the expected increase applying across the country, marginally in the North East (1 per cent). Firms in finance and business services (28 per cent) and tourism (16 per cent) have the largest balances expecting a further rise in new business volumes.

The volume of repeat business was broadly flat during the three months to September. While one in five (20 per cent) reporting an increase, 19 per cent reported a fall. The net balance is a modest drop on the previous quarter, on per cent comparing with two per cent during Q2 2017 and three per cent in Q1 2017.

Four in ten (39 per cent) of firms reported a rise in turnover on the three months to September. This compares to a quarter (25 per cent) who experienced a decrease. The balance, 13 per cent, compares to five per cent during Q2 2017 and 22 per cent in Q4 2016. Turnover growth was strongest in the Highlands and Islands again (26 per cent) and sales rose in all regions including the North East (8 per cent).

Inflationary pressures are continuing to impact upon costs for Scottish business, with 58 per cent of all businesses stating that costs rose over the last quarter. Just one in 16 (6 per cent) reported a fall. Cost pressures were most acute in tourism where a net 66 per cent reporting a rise in costs, followed by distribution (65 per cent) and construction (65 per cent).

High balances in services (53 per cent) and production (52 per cent) suggest a continuing broad-based rise in costs.

Just over half (51 per cent) of all firms expect costs to increase in the next six months, suggesting businesses are concerned that inflationary pressures will continue to build.

Capital investment continues to fall. One in five (20 per cent) firms reported that new capital investment rose in the three months to September. More than one in four (28 per cent) of firms report that capital investment fell. The balance, -8 per cent, follows -5 per cent reported in Q2 and the -8 per cent reported in Q1. All contrast markedly with +24 per cent in Q4 2016.

Stephen Boyle, chief economist with Royal Bank of Scotland, said: “These results provide welcome confirmation of continued, albeit modest growth and the prospect that the economy will continue to expand into 2018.

“The apparent return of sustained export growth is especially notable, likely underpinned by both sterling’s depreciation and the recovery in demand in the euro area economies. The persistence of inflationary pressures is unwelcome and suggests that households will feel a squeeze on their spending power for some time to come yet.”

Professor Graeme Roy, Director of the Fraser of Allander Institute, added: “The latest Royal Bank of Scotland Business Monitor shows that the Scottish economy has continued to grow over the summer, boosted by a strong performance in Scottish exports. This welcome news comes just a few days before the official GDP figures for the second quarter of 2017 are published on Wednesday.

“Rising costs continue to pose a challenge for many firms however, and Scottish businesses will be watching closely for any signs that the members of the Bank of England’s Monetary Policy Committee are reaching a consensus on the prospect of raising interest rates in the coming months.”