FSB Scotland Small Business Index, Q3, 2020

SCOTLAND Q3 2020

SMALL BUSINESS INDEX

Confidence has fallen amongst Scottish small businesses ahead of second wave of coronavirus infections and further restriction measures. The FSB Scottish Small Business Index (SBI) fell by 16.2 points to reach -26.3 in Q3. This marks the second lowest reading on record, outweighed solely by that witnessed in Q1 this year.

The fall in business confidence amongst firms in Scotland largely matches the UK trend, with businesses significantly more pessimistic heading into Q4 than was the case heading into Q3. This can be explained by the increase in rate of coronavirus infections in recent weeks, prompting heightened uncertainty amongst consumers and firms alike, while also bringing additional restriction measures. Nevertheless, Scottish small businesses exhibit slightly less pessimism than their counterparts across much of the UK, with only London (-25.8) seeing a less negative score.

The pattern of falling business confidence was witnessed across the UK as a whole, though some slight variation was exhibited across regions and nations. The UK-wide SBI saw a significant fall of 27.6 points in Q3, reaching -32.6. All of the UK’s regions and nations exhibited a fall in confidence between Q2 and Q3, with this being enough to take each of their scores into negative territory. This widespread negativity ahead of Q4 suggests that the recent spike in coronavirus infections and corresponding tightening of restriction measures has eroded any confidence that may have been built up over the summer months.

Greater resilience was shown amongst Scottish businesses, though more than half still reported falling revenues. The net balance of Scottish firms reporting growth in revenues during Q3 stood at -18.8%, a more positive (or, technically, less negative) figure than that for the UK as a whole (-25.1%). The third quarter saw a significant reopening of the economy, prompting a return to consumer and business activity. As such, firms faced a slightly more hospitable business environment. Scottish businesses appeared to benefit from this more than most, with more than a third (33.9%) of business reporting increased revenues. Only businesses in Yorkshire and the North East were more likely to experience increased revenues, where 37.4% saw taking rise. That is not to say that Q3 was not still highly challenging, – more than half of Scottish businesses (52.6%) still reported falling revenues during the quarter.

Looking ahead to Q4, Scottish businesses expect further improvement to revenue streams. The net balance of firms expecting revenue to increase in the final quarter of the year stands at -16.6%, an improvement on the figure based on actual revenue experience in Q3. Correspondingly, the proportion of firms expecting a further decrease in revenue in Q4 (48.7%) is lower than that experienced in Q3, while the proportion of firms expecting an increase in revenue (32.1%) is roughly similar to that of the third quarter.

Small Business Confidence

Net balance of small firms in Scotland reporting revenue/profit growth

Scottish employment continued to show more resilience than the national average, but foresee tougher future. The net balance for the change in employment amongst Scottish small businesses improved in Q3, reaching -13.5%, having stood at -21.5% in Q2. The most recent figures suggest that Scottish businesses continue to downsize their workforce at a lower rate than businesses across the UK as a whole, with the UK-wide net balance figure standing at -15.2%.

The more negative sentiment exhibited by Scottish businesses looking ahead to Q4 manifests itself in terms of expected changes to employment levels. Scottish firms expect further cuts to the size of their workforce in Q4, though the proportion of firms expecting to do so (18.2%) is smaller than was actually the case in Q3 (20.8%). Nevertheless, the proportion of firms expecting to cut the size of their workforce exceeds the UK-wide average (17.0%), possibly reflecting the impact of new restrictions across much of Scotland.

Scottish businesses’ investment intentions are weaker than the average UK small business. When considering the UK as a whole, the expected value of capital investment in the coming quarter compared to the previous quarter returned to slight positivity, with a UK net balance figure of 0.75%. Scottish businesses remain reluctant to invest in the coming quarter, however, with a negative net balance figure of -3.7%. Such weakened investment intentions are a reflection of the additional economic uncertainty facing firms, brought about by new restriction measures and falling consumer confidence. The fact that these restriction measures have been tightened across much of Scotland lends itself to a more cautious investment environment from the perspective of SMEs.

Return to economic activity sees specific, coronavirus-based costs affect Scottish firms. The net balance of Scottish firms experiencing an increase in costs in Q3 stood at 28.3%, with this figure only being exceeded by that of Wales (31.9%). Within this figure, Scottish firms were particularly less likely to witness falling businesses costs, with just 18.3% of businesses doing so, compared to 27.3% nationwide.

The return to economic activity witnessed across much of Q3 brought with it an increase in operating costs for many firms. New health and safety measures needed to be met in order to ‘Covidproof’ businesses on their return to operation, with this resulting in heightened regulation-related costs. Indeed, amongst Scottish businesses, only input costs (31.5%) were a more commonly cited source of changing costs than regulation (29.0%) in Q3.

Spare capacity still prevalent amongst Scottish businesses in Q3. Despite the return to economic activity over the summer months, spare capacity remained widespread across the UK in Q3. Scottish businesses followed this trend, with 71.4% of respondents reporting below capacity operations during the third quarter, a figure just shy of the national average of 71.5%.

Looking ahead to Q4, there are lower expectations of spare capacity, both on a nationwide and Scotland-specific basis. The proportion of Scottish firms anticipating below capacity operations for the fourth quarter stands at 69.0%, again standing just below the national average figure (69.4%).

Net balance of firms reporting employment growth, Scotland

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Share of firms reporting factor as main cause of change in business cost, Scotland