SCOTLAND Q1 2015 Voice of Small Business Index
Small businesses in Scotland have experienced a yearon-year decline in confidence. The Small Business Index for Scotland fell from +44.0 Q1 2014 to +20.4 in the latest quarter. However, the indicator does remain comfortably positive and 40% of small businesses expect prospects to improve over the next three months. Confidence is also up compared to the end of 2014.
Confidence levels for the UK are lower than a year ago, but still in positive territory. The UK experienced an annual fall in confidence levels of 7.0 percentage points, with confidence dropping from +35.7 in Q1 2014 to +28.7 in the latest quarter. While economic expansion slowed in the final quarter of 2014, the UK was one of the best performing advanced nations in terms of economic growth in 2014 and this momentum is expected to continue into 2015. The IMF forecasts that the UK economy will grow by 2.7% this year, slightly faster than the 2.6% recorded in 2014.
The unemployment rate in Scotland fell further below the UK average in the final quarter of 2014 to stand at 5.4%. This is a considerable improvement from the 7.2% recorded over the same period a year ago, supported by continued robust expansion in output. The latest GDP figures for Scotland show that the economy once again grew strongly in Q3 2014. Output grew by 0.6% in the service sector and by 3.2% in construction. However, lower prices for commodities such as oil and gas have begun to weigh on the production sector, which contracted by 0.7% in the third quarter of 2014, a trend that looks likely to have continued in the final three months of the year. With sharp cuts to capital investment in the North Sea oil and gas industry already announced, household consumption is likely to be a key driver of economic growth in the country through 2015, similar to the outlook for the UK as a whole.
Profit and revenue growth weakened for small businesses in Scotland over the last three months, but is expected to improve in the next quarter. This quarter, a net balance of 9% of firms reported increased revenues, the third consecutive quarter that this balance has fallen. The share of small businesses in Scotland reporting growing profits also dipped. However, expectations for both revenues and profits in the next three months are noticeably brighter. A net balance of 17% of firms believe profits will be higher over the coming quarter, which, if achieved, would be the best performance recorded since the series began in Q1 2012. Falls in the price of commodities such as oil and gas over the second half of 2014 have significantly lowered cost inflation for many businesses, helping to improve firms’ bottom lines. The weaker inflationary environment is also likely to support strong levels of household consumption. Headline inflation in the UK has fallen to just 0.3%, with the prices of essentials such as food and fuel falling on a year-on-year basis. This, alongside more buoyant wage growth, will provide a boost to household finances and should support spending.
http://www.scotland.gov.uk/Resource/0046/00462515.pdf
Source: FSB Voice of Small Business Survey. Sample of 1771 small businesses across the UK, with 174 small businesses surveyed across Scotland.
Net balance of small firms in Scotland reporting revenue/profit growth
Source: FSB Voice of Small Business Survey
Small businesses cut back headcounts over the last three months, but expect to return to hiring over the coming quarter. This quarter, a net balance of 9% of small firms reported decreasing their headcount over the past three months. This represents a turnaround from the recent expansions in employee numbers and, as such, is concerning. However, small businesses do not expect a return to the prolonged period of contractions experienced prior to Q2 2014. In fact, a net balance of 10% of small firms expect to increase staff numbers over the coming quarter.
Cost inflation continues to decline as the share of small businesses reporting rising costs shrinks by more than a third over the last year. The balance of Scottish small firms reporting rising costs compared with a year ago fell sharply again this quarter. A balance of just under 40% of businesses found costs had risen over the past 12 months, compared with a balance of 63% in Q1 2014. The reduced cost pressure has been supported by lower prices for many globally traded commodities. Crude oil for instance, an important benchmark for the costs of energy and fuel, has lost more than half its value since June 2014. Similarly the IMF’s commodity metals price index has fallen by more than 16% since July 2014.
Spare capacity rises, but is expected to fall back in the next quarter. Reflecting the declines in revenue growth, the proportion of small businesses not making full use of their productive resources rose to 54% in the last three quarters. This is up from 45% in the previous three month period and the highest level recorded since the first half of 2013. However, a net balance of 43% of small businesses in Scotland expect to be running below capacity over the next three months, which would continue the gradual decline in this indicator over the course of 2014. With this productive potential still available, businesses have reined in investment plans for the coming 12 months. A net balance of 15% of small businesses expect to increase investment over 2015, down from 28% a year ago
General economic conditions in the UK still worry businesses but concerns about customer demand have fallen. This quarter, 43% of firms reported that general domestic economic conditions are a potential barrier to growing their business, unchanged from the same point in 2014. However, concerns about customer demand holding back growth have eased compared with a year ago, with 31% of businesses citing the factor this quarter down from 38%. Instead, given the uncertainty surrounding the outcome to May’s election and the likelihood that further fiscal consolidation will follow, firms are becoming increasingly wary..
Overall, the latest findings from the Voice of Small Business survey indicate that, while activity appears to have slowed recently, the outlook for 2015 is encouraging. Despite revenue and profit growth slowing across the small business community, businesses are optimistic about their prospects. Concerns about customer demand over the next 12 months have fallen and these brighter prospects mean businesses expect to increase recruitment over the next quarter, helping to maintain the labour market’s momentum. A variety of factors including commodity prices and the strength of the pound are helping to keep costs under control, which should help to improve small businesses’ bottom lines. As such, 45% of small businesses in Scotland have aspirations to grow over the next 12 months. However, investment expectations have noticeably fallen back, which could pose a threat to the sustainability of this growth.
Net balance* of small firms’ employment growth
Source: FSB Voice of Small Business Survey
Overall change in costs during past three months compared with a year earlier
Source: FSB Voice of Small Business Survey
Share of firms reporting factor as perceived barrier to growth, Scotland
Source: FSB Voice of Small Business Survey