SCOTLAND Q1 2016 SMALL BUSINESS INDEX
Small business confidence in Scotland has fallen into negative territory. This quarter, the Small Business Index stands at -2.0, down from +20.4 at the same point a year ago. While confidence has been relatively low in recent quarters, this represents the first time in three years that it has turned negative, with more firms expecting business conditions to deteriorate over the coming three months than expecting an improvement.1
Confidence among small businesses across the whole of the UK also fell to its lowest level in three years. The UK Small Business Index fell to +8.6, which although positive, represents the lowest level since Q1 2013. Overall, the results suggest that the UK economy faces a number of challenges in the coming quarters. The expectations of small businesses across the UK suggest that the latest forecasts for the UK economy from the Bank of England, who project GDP growth of 2.2% across 2016 as a whole, are fairly optimistic.
The continued fall in small business confidence looks to be feeding into fragile Scottish economic growth. The latest figures from the Scottish Government show that output rose by just 0.1% quarter on quarter in both Q2 and Q3 2015, well below that seen across the UK as a whole. The combination of falling output in the manufacturing sector and slowing growth in the key services sector has increasingly squeezed growth in Scotland in recent quarters. Output in manufacturing fell by 2.3% over the past 12 months. The services sector continues to grow but the rate slowed to 0.7% yearon-year in Q3 2015 compared with the 2.3% recorded in the same quarter of 2014. There is some positive news in the labour market with rising employment (74.8%) and falling unemployment (5.8%), albeit unemployment levels lag behind the UK (5.1%).
The net balance of Scottish small firms’ profit growth has turned negative for the first time since Q1 2014. This quarter, a net balance of 2% of small businesses in Scotland reported increased revenues over the last three months. While notably lower than the 15% balance recorded in the previous quarter, it is nevertheless more positive than the figure for gross profits, with a net balance of -12% reporting increased profits over the past three months. Despite the cost of various inputs such as vehicle fuel, gas and electricity falling, the negative balance suggests that these factors have not been strong enough to keep smaller businesses in the black. Looking ahead, businesses overall anticipate that growth in turnover and profits will improve slightly in the next three months. However, the net balance of expectations for gross profits in the coming three months remains negative.
Smaller businesses have cut back headcounts over the past three months though plan to return to hiring in the coming three months. This quarter, a net balance of 8% of small firms said that they’d decreased their headcount during the past three months. This represents a somewhat concerning reversal from the three consecutive expansions in employee numbers recorded in previous quarters. 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 7% of small firms expect to increase staff numbers over the coming quarter. Given likely job cuts in the public sector, the recovery in hiring intentions will be important to stem further weakness in the Scottish labour market.
Concerns about the domestic economy jump to a record high. This quarter, 64% of firms reported that general domestic economic conditions are a barrier to growing their business, well up from the 49% recorded in the previous quarter, and the 43% in Q1 2015. Concerns about macroeconomic conditions are also rising. However, credit conditions eased further in the latest quarter. The share of firms reporting that credit availability is poor fell to 40% this quarter, down from around 48% seen through most of 2015. Additionally, pressure from input costs has subsided notably compared with the first quarter of 2015.
Despite the drop in confidence, investment intentions among small firms in Scotland remain steady. This quarter, a net balance of 19% of companies expect to increase their capital expenditure over the coming 12 months, broadly unchanged from the previous two quarters. The improved availability of credit is probably one of the factors that has supported stable investment intentions among Scottish small businesses. Given that business investment is an important driver of sustainable economic growth, these findings are positive for the longer-term economic outlook and for the Scottish Government’s aim to boost productivity. The diversification of growth towards increased business investment would also help to reduce the dependence on household spending.
Overall, despite some positive findings, the latest Small Business Index will be of concern for Scotland’s policymakers, as the measures for confidence and profits both fall into negative territory. Following a couple of quarters of stable but slow economic growth, the latest figures suggest that small businesses in Scotland expect conditions to deteriorate slightly over the next three months. Many of the factors weighing on the optimism of business owners - such as uncertainty in the global economy, financial markets and shaky consumer confidence - will persist. That said, a number of the more medium-term indicators, such as hiring and investment intentions, remain fairly steady despite the dip in confidence.
Net balance of firms reporting employment growth,