The latest SCC Quarterly Economic Indicator survey for Q1 of 2019 shows the health of the Scottish economy weakened considerably in the first quarter of this year. With the backdrop of an uncertain global environment and the cloud of Brexit hanging over the UK economy, key Scottish industrial sectors have experienced an investment slowdown as business costs and Brexit preparations take top priority.
- On Wage Increases: Every sector in the survey faced rising wage pressures with construction and retail reporting the biggest wage increases in over a dozen years.
- On Investment: Investment performance is lower in every sector year on year except construction, while investment intentions remain restrained confirming a wait-and-see approach to spending.
- On Business Confidence: The level of business optimism is lower across all sectors but retail compared to the previous quarter. Manufacturing has been particularly hit, as confidence dipped to the lowest level recorded for the sector since 2012.
Commenting on the results, Tim Allan, Chairman of the Scottish Business Advisory Group and President of Scottish Chambers of Commerce, said:
“The prospect of a no-deal Brexit has undoubtedly taken a toll on business confidence in Scotland in the first quarter of 2019. Companies in Scotland are caught in a pincer movement of business challenges. On one hand, businesses are faced with increased cost pressures such as rising costs due to currency weakness and higher wages, and on the other they are hit by the dampening effects of political turmoil caused by the ongoing uncertainty of our future relationship with the EU.
“There is an immediate urgency to deal with Brexit, which is hampering our ability to compete on the international stage. We see this borne out in the decline in confidence, difficulties in recruitment and challenges in exporting. Furthermore, restraint on plans to invest will do nothing to solve Scotland’s ongoing productivity challenge which requires sustained levels of investment in skills and training if we are to see the shift the economy needs.
“Our survey has shown some real areas of robustness which highlights the resilience of Scottish businesses and their resolve to stay focused on creating jobs and paying taxes to fund vital public services. But the pressure on Scottish firms is rising, with the prospect of increased costs due to inflation, currency volatility, Brexit preparations and the prospect of increased taxation remaining as top concerns for all sectors.”
Professor Graeme Roy, Director at the University of Strathclyde’s Fraser of Allander Institute, said:
“This latest Scottish Chambers of Commerce Quarterly Economic Indicator shows that Scottish businesses remain relatively resilient despite uncertain trading conditions. The lack of clarity about the UK’s terms of exit from the EU continues to cast a shadow over day-to-day decision making, with businesses clearly struggling to make long-term plans in such times.
“Weak business investment has been a feature of recent times, and this latest survey shows that firms are becoming even more reluctant to make investment decisions at this present time. This is an unwelcome sign given the key role that investment plays in boosting productivity, and in turn improving long-term economic prosperity.
“With high rates of employment across the Scottish economy, the survey also identified that for many firms, pressure for pay increases remains on the up.”
On Wage Increases and Cost Pressures, Tim Allan, continued:
“Every sector in the survey faced rising wage pressures with construction and retail reporting the biggest wage increases in over a dozen years. Scottish employers are counting the cost of tightened labour markets as well as rises in pension contributions, the apprenticeship levy and National Minimum Wage.
“In addition, tourism, retail & wholesale and financial & business services experienced higher than expected additional overhead costs for the first quarter of the year, potentially as a result of having to plan for the risk of a no-deal Brexit.”
On Investment, Tim Allan, said:
“Investment performance was lower in every sector year on year, with the exception of construction, which still experienced restrained levels of investment. Political turmoil has had a clear impact on the ability of businesses to invest in new staff, new equipment and expansion. If the recent uncertainty that has been hanging over businesses can be cleared, the economy is likely to benefit from a significant spike in new investment.
“Likewise, a stable domestic policy environment which prioritises skills development and a competitive non-domestic rates package would provide a clear signal of confidence to the private sector and unlock investment.”
On Exporting and International Business, Tim Allan, said:
“The manufacturing industry experienced a continued decline in export orders, as an uncertain global economy and UK’s prolonged negotiations with the European Union, start to impact on company order books. The tourism sector experienced a noticeable fall in the number of visitors coming from the European Union and the rest of the world, in comparison to the same numbers for Q1 2018. ‘Staycations’ from Scottish visitors remained the only positive visitor trend for the sector. Boosting levels of international trade is crucial for the Scottish economy and maintaining a business-friendly trading environment with the European Union will act as a critical enabler of Scotland’s future exporting potential as well as our ability to attract investment and visitors to Scotland.”