ICAEW: Scotland leads UK in export growth as business confidence returns to positive

ICAEW: Scotland leads UK in export growth as business confidence returns to positive

David Bond

Scottish businesses have witnessed a surge in confidence, registering in positive territory for the first time in a year, despite the ongoing challenges, according to a survey by ICAEW.

The Business Confidence Monitor (BCM) index, published today, rose to +6.4 in the second quarter of 2023, up from -0.2 in Q1, mirroring the UK average and slightly surpassing Scotland’s historical average.

Scotland saw the highest export growth in the UK, and domestic sales had one of the largest rates of increase too, at 5.6% compared to the UK’s 4.9%, likely underpinning the confidence reading. However, the growth of both exports and domestic sales are expected to slow in the year ahead, with the latter expected to be the slowest in the UK.

Companies in Scotland have faced a number of challenges, including record annual input price inflation which has been driven by the cost of energy, commodities and wages. Input price inflation is running at its fastest rate in Scotland since the survey began in 2004, however this is expected to slow down in the next year.

Consequently, selling prices have grown sharply, at their largest rate since the survey began in 2004, but a more modest rise is expected next year as input cost pressures ease.

Salary growth is more than double the historical average, reflecting a continued demand for workers, however this growth is expected to ease next year. The workforce in Scotland is expanding at a rate close to its historical high, and above the historical average. However the rate of growth is on a downward trend, mirroring expectations around domestic sales and exports.

Despite the higher costs for businesses, profits are continuing to rise, with growth of 5% expected to continue into the next year.

Meanwhile, 44% of businesses surveyed cited regulatory challenges as a growing difficulty, which may reflect the prominence of banking, finance and insurance in Scotland’s economy. Concerns about the tax burden have reached a historical high, likely related to the recent increase in corporation tax. The number of businesses concerned about bank changes has surged: 24% of companies reported it as an issue, up 15 percentage points since the previous quarter.

Research and development budgets in Scotland are growing at the fastest rate in the UK, although a slowdown is expected next year. Capital investment is up, and at similar levels to the UK average, although these levels are likely being held down by weak confidence and higher levels of spare capacity than the UK average.

ICAEW said that to boost confidence, government plans must be formulated to deliver long-term growth by increasing the resilience of the UK economy and the transition to net zero, while enabling small businesses to operate more sustainably in a difficult economic environment.

David Bond, ICAEW director, Scotland, said: “It’s pleasing to see that confidence is back in positive territory, but while we are seeing rising profits, increasing investment and the highest export growth in the UK, these findings show that there are still very real difficulties to address.

“In particular, record input price inflation is having a real impact, while our businesses also reported growing challenges from the tax burden and regulation.

“It’s time for the UK and Scottish governments to deliver a growing and resilient economy which enables businesses of all sizes to operate effectively.”

Nationally, business confidence remains lower than the pre-pandemic average but still positive amid a backdrop of high inflation and interest rates and record wage pressures, with sentiment at 6.1 on the index.

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