Weak sterling offers Scottish export boost but growth remains fragile, says RBS

Companies across the country have reported modest growth in the three months to February, with the 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 in late 2016.

The findings are contained within the latest Royal Bank of Scotland Business Monitor, conducted by the University of Strathclyde’s Fraser of Allander Institute.

The survey of more than 400 Scottish businesses reveals that more than a quarter (27 per cent) of businesses enjoyed an increase in export activity in the three months to June, compared to less than one in five (18 per cent) who reported a decline.

The balance of nine per cent compares with a flat first quarter to the year and a balance of -16 per cent during the final quarter of 2016 and -11 per cent in Q3 – making this the first positive balance in two years. The production sector leads the way with 21 per cent reporting an increase in exports. The least was services with three percent.

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

The Monitor reveals that a third (34 per cent) of firms reported an increase in the total volume of business during the last quarter, compared to 28 per cent who witnessed a fall in activity. The balance of six percent represents a rise of three points since the first quarter of 2017.

A net one per cent of production sector firms reported a fall in activity with the decline most prominent in construction (-6 per cent). A balance of 7 per cent of services businesses reported rising business volumes, with above average growth in finance and business services and tourism.

Growth was strongest in the Highlands & Islands (20 per cent) but weak again in the North East (-2 per cent).

Collectively, a net 24 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, including a net 12 per cent in the North East, suggesting that the prolonged hangover in the region since 2014’s oil price collapse is coming to an end.

New business continued on the upward trend first reported in the second half of 2016. A third (33 per cent) stated that the volume of new business rose in the three months to June, compared to one in four (24 per cent) who stated it fell. The balance of nine per cent is an improvement of three points on Q4 2016 but a drop of one per cent from Q1 2017.

A large balance of firms in the Highlands and Islands (+28 per cent) said new business had increased with smaller, positive balances and in East Central Belt and West Central Belt (both +12 per cent). Volumes declined in the North East (-5 per cent).

A net 19 per cent of firms expect new business volumes to increase in the six months to December, with the expected increase applying across the country, including the North East (+12 per cent). Firms in finance and business services and manufacturing (both +22 per cent) have the largest balances expecting a further rise in new business volumes.

The volume of repeat business improved during the last quarter, but modestly. While one in five (19 per cent) reporting an increase, 17 per cent reported a fall. The net balance is also a modest drop on the previous quarter, two per cent comparing with three per cent during Q1 2017.

Four in ten (36 per cent) of firms reported a rise in turnover on the three months to February. This compares to nearly a third (31 per cent) who experienced a decrease. The balance, five per cent, compares to four per cent during Q1 2016 and 22 per cent in Q4 2016. Turnover growth was strongest in the Highlands and Islands (24 per cent) while in the North East (-7 per cent) more firms reported falling than rising sales.

Inflationary pressures are continuing to impact upon costs for Scottish business, with 56 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 72 per cent reporting a rise in costs, followed by distribution (66 per cent) and manufacturing (49 per cent).

A net 49 per cent expect costs to increase in the next six months, suggesting businesses are concerned that inflationary pressures will continue to build.

Capital investment continues to decline. One in five (22 per cent) firms reported that new capital investment rose in the three months to June. More than one in four (27 per cent) of firms report that capital investment fell. The balance, -5 per cent, follows the -8 per cent reported in Q1 and contrasts markedly with 24 per cent in Q4 2016.

Stephen Boyle, chief economist with Royal Bank of Scotland, said: “Scotland’s economy continued to grow in the second quarter, albeit very modestly. More encouraging is the outlook, with a greater proportion of businesses expecting higher levels of activity in the second half of the year. Inflationary pressures remain strong and, with wage growth weak, households will be under pressure; consumer-facing sectors will see a further weakening in demand. Prompted by the weaker pound and stronger growth in the euro are, the return of export growth is welcome but falling business investment is a concern for longer-term growth prospects.”

Professor Graeme Roy, director of the Fraser of Allander Institute, added: “These latest figures from the Scottish Business Monitor indicate that Scottish businesses are remaining resilient in the face of challenging trading conditions. Businesses reported a further improvement in activity, although levels of growth remain relatively fragile. Inflationary pressures are an increasing concern but the fall in the value of Sterling is providing a welcome boost for Scotland’s tourism sector and exporters.”