Business confidence in Scotland has significantly improved in the last quarter, but remains in negative territory, as companies stay wary of persistent economic challenges.
Sentiment tracked by Institute of Chartered Accountants in England and Wales’ Business Confidence Monitor put confidence at -0.2 on the index for Scotland during the first quarter.
This marks a vast improvement from the fourth quarter of 2022, when Scottish business confidence hit a 14-year low of -27.8, but the results are still lower than any other UK nation or region; bar London.
David Bond, ICAEW director for Scotland, said: “These findings suggest that Scottish businesses are cautiously optimistic, but their confidence remains fragile.
“While factors including the impressive domestic sales growth provide strong evidence to be hopeful and demonstrate the resilience of companies across Scotland, the continued prominence of challenges including the skills shortages within the labour market, as well as the rising tax burden, indicate that they are aware of the potential for a reversal of fortune.”
Scottish businesses continue to navigate a challenging labour market with concerns about the availability of non-management skills and staff turnover more widespread than in other nations and regions. Approximately two fifths of firms cited them as key areas of concern.
Regulatory requirements have returned as one of the most widespread challenges for Scottish businesses, with more than one third of companies reporting them as a growing issue. The dominance of this problem in the banking and insurance sector - which are major facets of the Scottish economy - might explain why this figure is higher than the UK average.
Another growing problem for Scottish businesses is the tax burden, with 30% of businesses citing this as issue. Tax burden difficulties have increasingly engulfed the energy, water and mining sectors, which also make large contributions to the Scottish economy.
As a result of the labour market difficulties, average total salaries are increasing at their fastest rate since the fourth quarter of 2007; a similar rise is planned by Scottish businesses for the year ahead.
Scottish businesses are also still working through a challenging cost environment, in part due to the persistent supply chain disruptions, as well as the increased commodity and energy costs brought about by the ongoing war in Ukraine.
Annual input price inflation is currently running at 6.1% in Scotland, which is the highest rate since the survey began in 2004. Companies expect this pace to ease over the forthcoming 12 months to 3.5%, which is the slowest expected rise across the UK.
Selling prices are also experiencing a sharp increase, with the 3.3% rise in the first quarter this year, being the highest in Scotland for nearly 20 years. However, while input cost pressures weaken, selling price gains are anticipated to moderate, with a rise of 2.1% expected.
Domestic sales growth in Scotland rose by 6.7% in the year to the first quarter of 2023, which was the most significant increase across the UK. However, the pace of future growth is anticipated to slow down to 4.0% over the next 12 months.
Export growth meanwhile is expected to strengthen from 3.8% to a rate of 4.5% in the year ahead.
The combination of growing sales and increased selling prices has enabled a continued rise in profits. Nonetheless, the projected slowing of domestic sales growth combined with smaller selling price rises has prompted an expectation that profit growth for Scotland will be slower than all other UK nations and regions during the upcoming year.
Scottish companies are anticipated to reduce their investment rates. While capital investment increased by 2.5% in the year to the first quarter, which was a narrowly faster pace than the UK average, the survey found that businesses in Scotland plan to increase capital spending in the next 12 months by only 1.9%.
Research and development budgets saw a similar modest increase within the same timeframe and will also undergo a slowdown in budget growth over the year ahead.
Nationally, business confidence returned to positive territory for the first time in a year, but remains fragile amid a backdrop of economic volatility, with sentiment at 2.5 on the index.
ICAEW said that to build on the confidence reading, the government must form an ambitious plan to inject resilience into the UK economy to boost business confidence and deliver long-term economic growth.
A total of 50 chartered accountants based in Scotland responded to a telephone survey between 16 January and 23 March 2023.
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