Given how unpredictable 2022 turned out to be, it seems like folly to make anything but educated guesses on what's going to happen in 2023.
So that's what we've asked various consultancies and their sector experts to do.
Jon Shelley, head of deals for PwC Scotland, said: “Fintech, medtech and edtech are all looking like bright spots for economic growth where funding is readily available and Scotland has a rich seam of entrepreneurship.
“Additionally, planned infrastructure investment, particularly in new energy infrastructure, presents a massive opportunity for Scottish business to capitalise on.
“Concerns remain around supply chain spending, and that it could benefit overseas business more than domestic, although some Scottish businesses are very well positioned to capitalise.”
His colleague Susie Simpson, private business leader at PwC Scotland, added: “There is a need to recognise the challenges faced by entrepreneurial businesses in attracting high-skilled talent north of the border, given the increasing differential in income tax rates, and policies on areas such as stamp duties on the acquisition of properties in our largest hub cities.
“More and more of our crown jewel Scottish businesses which are determined to keep their roots in Scotland - manufacturing here where they can and making the most of brand Scotland - now so often now need to look outside Scotland to meet their recruitment challenges and needs.”
The wider economy
KMPG predicts that the UK economy will shrink by 1.3% in 2023, amidst a relatively shallow but protracted recession, followed by a partial recovery in 2024, which could see GDP rise by 0.2%.
Elevated inflation and rising interest rates are likely to continue to put pressure on households’ living standards, while companies’ margins and investment are being hit by rising interest rates and ongoing geopolitical uncertainties, slowing global growth over the medium term.
KPMG expects overall investment to shrink by 0.7% in 2023, before recovering by 0.2% in the following year.
Yael Selfin, chief economist at KPMG UK, commented: “Households are expected to rein in spending on discretionary items in 2023 in response to the squeeze on income.
“As consumers cut back on spending, we anticipate a sharp reduction in non-essential categories of spend by those households most affected by the rise in energy and food costs, including spending on eating out and entertainment.”
KPMG’s new forecast sees average inflation over 2023 revised to 7%, up from 5.6% in its previous report. The fall in the headline rate partly reflects the dropping out of price increases from the 12-month period that is used to calculate inflation, as well as potential falls in some commodity prices.
The labour market has already begun to cool off, with expectations of lower turnover putting less pressure on employers to recruit, while employees are becoming more cautious to move jobs in light of further uncertainty.
KPMG expect the higher interest rates environment to gradually translate into weaker housing market activity, factoring a 8.5% peak-to-trough fall in its forecasts, which reduces both consumer confidence, as well as the value of collateral available for homeowners to borrow against in order to finance spending.
Overall export volumes are still some way from their pre-pandemic levels, with the UK performing relatively poorly since the pandemic. KPMG expects UK exports to rise in 2023 by 4.6% and by 1.1% in 2024.
Three quarters of large businesses identified rising costs as the biggest risk to their business in 2023, according to Edinburgh-based consultancy Proteus.
It commissioned Censuswide to survey 250 senior decision-makers in UK companies with more than 1,000 employees, with 56% stating that rising energy costs are a big risk to their business next year, while 37% flagged rising staff costs and 30% are worried about rising infrastructure costs.
Beyond costs, wider economic volatility is perceived as a threat in the year ahead, with 45% of business leaders are concerned about the risks posed by the weak pound, and 38% by volatile markets.
Despite this range of risks, most leaders are set to increase spending across key corporate priorities in the year ahead. Across 13 categories of spending, a majority of leaders expect their outgoings to increase in every area except staff bonuses, acquisitions and charitable spending.
More than half (55%) are increasing spend on employee benefits, and 48% on staff bonuses. A further 59% are spending more to try to bolster recruitment, while 63% are investing in staff training.
The biggest increase in spending is set to be on software such as enhanced IT systems; confirming a trend of investment in digital transformation as essential to business survival. Despite a looming recession, 69% of leaders are also set to increase their spending on sustainability initiatives - with just 4% planning to cut their spend.
Craig Mackay, chief executive of Proteus, commented: “There is a thin, but visible, silver lining to the current economic crisis; the resilience and determination of British business.
“Despite rising costs, unprecedented unpredictability in the global economy and stagnating consumer confidence, business leaders continue to think long-term about growth, competition and their teams.
“Those businesses which have the finances available would do well to consider their options for growth and change, in order to come out of the hard times stronger.“
Jason Higgs, deals partner at PwC Scotland, said: “As we look ahead to 2023, inflationary pressures may temper, but are likely to remain above recent historical norms.
“Liquidity for investment in debt and equity exists - and in quite large quantities still - but investors are more selective and the capital is more expensive, which could be a shock for businesses trying to refinance or facing liquidity challenges.
“While a softening of the jobs market will help in certain areas, there will continue to be tightness in specific highly-skilled areas, and the continued pressure on households around cost of living will further intensify challenges in consumer sectors.
“That said there are still some positives to be seen,“ concluded Higgs. “A lot of the economy in Scotland is driven by energy and financial services, and these will continue to be resilient in 2023.
“With energy prices continuing to be high, and a desire to ensure security of supply, this will drive investment and returns in UK energy - this investment will be reflected in the creation of green jobs.“
PwC's latest Green Jobs Barometer showed that in 2022, 3.3% of all job adverts in Scotland were for roles that have a positive impact on the environment, up from 1.7% in 2021.
Energy
Within the energy sector as a whole, companies are looking to recalibrate strategies and shift capital allocation, while governments mull windfalls and incentives, as decarbonisation gains momentum.
Energy consultancy Wood Mackenzie reckons themes to watch for in 2023 include operators’ shifting capital allocation dynamics, growing renewable energy investment and continued reconfiguring of oil and gas projects.
The oil and gas sector will largely complete the deleveraging phase of the current cycle in 2023, with the largest groups aiming for net debt zero to bulletproof balance sheets. More highly-geared players could also reach their optimal state, particularly if oil remains above US$80/bbl.
“We could see a record year for buybacks in 2023,” said Tom Ellacott, senior vice president of corporate oil and gas for Wood Mackenzie. “We are forecasting that 54 of the world’s largest oil and gas companies will generate $400bn in surplus cash flow - post dividends but pre buybacks - at US$95/bbl.”
“The majors and US independents have re-invested just 27% and 35%, respectively, of their year-to-date operating cash flow in 2022, so most will look to increase re-investment rates to maintain or grow oil and gas production, accelerate decarbonisation and expand into renewable energy.
Ellacott also thinks more cash-funded mergers and acquisitions seems likely.
Decarbonising oil and gas portfolios and developing resources responsibly will be a top priority, but activity levels must increase if future supply shocks are to be avoided, according to Wood Mackenzie's head of upstream analysis Fraser McKay.
The number of major projects likely to take final investment decisions in 2023 will remain flat, with around 30 projects proceeding. “Operators will seek the sweet spot where social licence and fiscal incentives align with advantaged barrels,” said McKay.
Governments in the main producing countries may try to marry low-carbon credentials, with increasing upstream investment in 2023. International operators will therefore need to demonstrate and disclose further emissions reductions. Spend on decarbonisation will increase, with a focus on methane emissions reduction and carbon capture and storage.
McKay continued: “Developments will become ever more entwined with renewables, low-carbon hydrogen and offsetting projects to balance emissions - by the end of 2023, it will be extremely hard for mainstream operators to sanction projects without emissions mitigation plans.”
Ellacott added that the European oil and gas majors will set the pace, with the likes of TotalEnergies, Shell and BP potentially investing more in renewables than some big traditional utilities.
Commercial property
Property investment markets are expected to emerge from a period of uncertainty and pricing will likely stabilise towards the end of 2023, with a continued flight to quality and sustainability being key drivers of activity across all asset classes, according to CBRE.
Steven Newlands, head of capital markets for CBRE Scotland, anticipates further inbound investment into the UK market. “While we forecast investment volumes will drop somewhat, the UK real estate market benefits from a diverse investor base - the realignment of prices towards the end of 2022 means that 2023 may provide opportunities for private capital to enter the UK market.”
Much like in the energy sector, environmental friendliness is also key here.
The implementation of more mandatory disclosure requirements and high energy prices will accelerate sustainability action within the market, from both investors and occupiers. Buildings with greater energy efficiency or using onsite renewables may well be insulated from the worst of the energy price shock.
Many new offices feature such sustainable technologies.
CBRE expects leasing activity to be constrained due to a fall in office-based employment in 2023, with continued strong demand for the most sustainable and inviting office space - and as a result - the appetite for properties that are newly developed or refurbished will remain high.
This also means that retrofitting existing office buildings will be a key driver for growth in 2023, according to JLL.
David Smith, managing director of CBRE in Scotland, said: “In Edinburgh, the short to medium term supply pipeline is a real concern - for Scotland’s capital to have this little future stock is an issue if we are seeking to attract new corporate occupiers into the city.
“In Glasgow, 2022 has been slow in terms of activity, where you could say this is linked to a lack of quality product - Grade A vacancy is 0.4% - however, it is likely linked to getting people back into offices.
“The Aberdeen market is counter cyclical to the rest of the UK market - having experienced a challenging period since the last energy sector downturn, the occupational and employment market in the north east is the strongest it has been for eight years.”
Finally, in industrial and logistics, CBRE anticipates occupational activity levels will remain above long-term averages.
The market faces challenges though, including critically low levels of supply, increasing construction costs, rising exit costs and higher exit yields.
Smith added: “In Scotland, the industrial market has remained resilient and 2022 has been largely positive from a deal and rental growth perspective.
“Looking ahead, the key issue for the central belt remains a distinct lack of brand new or modern warehouse space - this has been an issue for several years due to a strong period of occupational demand - and we anticipate that the shortage of stock across all size bands will remain a challenge for occupiers.”
Don't miss the latest headlines with our twice-daily newsletter - sign up here for free.
