SCOTLAND Q3 2015 Voice of Small Business Index
Small business confidence in Scotland has fallen back notably, but still remains in positive territory. This quarter, the Small Business Index stands at +1.7, down from +26 at the same point a year ago. Although confidence has not stood lower since the start of 2013, a positive balance of firms expect business conditions to improve over the coming three months. This suggests that economic growth among small businesses is likely to continue on a steady pattern, rather than picking up rapidly or falling back. Confidence among small businesses across the whole of the UK also fell back this quarter to stand at +20.3. Again, this movement in the Index points towards stability in growth conditions, with more than four in 10 small businesses expecting the environment to remain the same over the next three months. The economy is projected by the Office for Budget Responsibility (OBR) to expand over 2015 as a whole by 2.4%. Although this is down from a stronger performance in 2014, it shows the UK settling into its stride after the turbulent previous five years. In addition, these latest findings of steady growth expectations are in line with the OBR’s forecast of the rate of GDP expansion remaining on hold over 2016.
Growth in Scotland’s economy has also been on a stable footing recently. The latest figures from the Scottish Government show that output rose by 0.6% each quarter between Q3 2014 and Q1 2015. However, at first glance it appears that continued economic expansion is no longer feeding through into improvements in the headline labour market figures. Unemployment has now been fluctuating between 5.5% and 6% since the middle of 2014, and year-on-year employment growth is slowing to near the 1% mark, down from over 2% at a similar point a year before. However, there are signs that, despite this slowdown, companies are continuing to make greater use of the labour force. The share of people in Scotland working part time only because they cannot find a full-time job is on the way down, reaching 15.8% in the 12 months to March 2015. This is down from the 17.4% we saw after the UK recession of 200809. This trend across the Scottish economy as a whole of making greater utilisation of staff by increasing hours is likely to continue in 2015, reducing slack in the labour market.
The proportion of Scottish small firms reporting revenue growth has fallen back again this quarter, with a net balance of 6.1% reporting an increase. This share is down from 17% at the same point a year before, although still represents Scottish small firms seeing rising turnover on average. However, the net balance of firms reporting rising profits has fallen into negative territory, at -2.7% this quarter, ending the run of five quarters of uninterrupted profit growth. This suggests that although various key input costs, such as vehicle fuel and gas prices, have fallen back recently, this is not enough to support profitability. Looking ahead, businesses anticipate that growth in turnover and profits will improve slightly in the next three months, reflecting the slim majority of small firms expecting trading conditions to improve.
Although employment growth is slowing in Scotland’s labour market as a whole, small firms appear to be preventing it from slowing further. This quarter, a net balance of 5% of small companies reported increasing headcounts in the past three months. This is the second consecutive quarter of staffing increases, but only the fourth quarter of growth on this measure since the metric began in 2010. In addition, further job creation in the future is expected by a net balance of 7% of small firms. These are encouraging findings, as private sector hiring will be needed to offset planned government job cuts over the coming years. However, one factor that may constrain growth in the near future is the emergence of skills shortages. This quarter, 40% of firms cite this problem as a main barrier to achieving their growth aspirations over the next year – the highest share since comparable data began at the start of 2013.
Credit conditions are showing signs of improving for Scottish small firms. This quarter, only 37% of companies report that credit is unaffordable, following a general downward path from the end of 2014 and well below the figures in excess of 60% seen in 2012 and 2013. Likewise, the proportion of firms reporting that credit availability is poor has dropped to 48% this quarter, down from over 70% across much of 2013. These findings are positive, illustrating how it is becoming easer for small businesses to access the overdrafts for their day-to-day cashflow needs or the loans required for making longer term investments. Ultimately, these trends lead to more sustained economic growth, and help to shore up business finances during leaner times.
Investment intentions among small firms in Scotland are holding fairly steady. This quarter, a net balance of 18% of companies expect to increase their capital expenditure over the coming 12 months, broadly unchanged from recent quarters and potentially being supported by easier credit conditions. Buoyant business investment is needed for sustainable economic growth over the long term as it raises productivity and helps to broaden the economy, reducing the dependence on consumer spending for growth. In addition, the OBR’s economic GDP forecast for 2016 is reliant on a pick-up in business investment. With Scotland making up nearly 10% of the UK’s economy, solid investment spending among Scottish small firms will be needed in order to realise this forecast.
Overall, the latest findings from the Voice of Small Business survey for Scotland may concern policymakers, with confidence, revenues and profits all falling. However, it could be argued that, although the confidence index has dropped to near zero, this suggests stable conditions, rather than a dramatically booming or contracting economy. More positively, steady growth is feeding though into job creation at small firms, a trend that will help to bolster the economy against the threat of government job cuts. In addition, more favourable credit conditions will, to an extent, protect small firms from day-to-day cash flow issues and provide financing for larger investment decisions. Ultimately, these latest findings highlight how the current recovery remains on a relatively fragile footing – growth is continuing at a steady pace, but a small shock could send things off balance and see more difficult business conditions re-emerging.
Net balance of firms reporting employment growth,
Source:
Source: FSB Voice of Small Business Survey
Source: FSB Voice of Small Business Survey