FSB Scotland Small Business Index, Q2, 2021

SCOTLAND Q2 2021

SMALL BUSINESS INDEX

Businesses optimism rose in Scotland in the second quarter of 2021 according to the latest FSB Small Business Index. Confidence amongst Scottish small businesses improved by 1.7 points between Q1 and Q2 2021, reaching a reading of 20.5 points. This improvement comes as restriction measures in the country were eased substantially, prompting an uptick in economic activity.

Though small businesses continue to exhibit confidence across much of the UK, Scotland was one of only three regions to record an improving SBI reading between Q1 and Q2. Scotland’s higher score in Q1 could be explained by its slower lifting of restriction measures compared to the rest of the UK, particularly England.

Only the South East recorded a larger uptick than that of Scotland, amounting to 6.9 points. Scotland was amongst the weakest scorers in Q1 meaning there was more scope for improvement as the economic recovery further took hold over the past months; nevertheless, Scottish confidence is now higher than the UK average.

The UK SBI reading subsides slightly, yet more businesses remain confident than not. The UK-wide Small Business Index saw a slight dip in Q2, reaching 18.6. This marks a fall of 8.7 points, having stood at 27.3 in Q1.

Scottish businesses amongst least likely to see improving profits in Q2. Small businesses in Scotland appear to be among those with the weakest profit growth in the UK. A net balance of -9.7% of small businesses in Scotland reported gross profit growth in Q2, meaning the number of businesses seeing profits drop from the previous quarter exceeded the number of those seeing higher profits. This was also the case when considering the UK-wide sample with a net balance figure of -1.4%. The weak profitability of Scottish businesses in Q2 may be explained by the prolonged restriction measures in the country, which have curtailed economic activity at the aggregate level.

Scottish businesses were least likely to expect growth over the next 12 months, though more firms plan to grow than contract. With a share of the Scottish economy still in its early stages of reopening, many businesses are likely tiding themselves over to ensure a smooth return to normal operations, putting growth aspirations on hold.

The net balance of Scottish firms expecting to grow over the coming year stands at just 17.9%, again the weakest figure of any region or nation on this metric, and falling considerably short of the next weakest score. Scotland’s subdued growth outlook likely reflects similar trends to those underlying the profitability estimates.

Small Business Confidence

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

In terms of profitability, Scottish small businesses are the UK’s least optimistic looking ahead to Q3. The net balance of small businesses in Scotland expecting gross profit growth in the coming quarter stands at -5.3%. This is by far the weakest figure of any region or nation, with London being the only other to exhibit a negative score at -0.9%.

Fewer Scottish businesses expect their workforce to grow in Q3 than the UK average. A net balance of -3.4% of small businesses in Scotland reported growth in workforce size in Q2. Meanwhile, a net balance of 4.6% of small businesses in Scotland expect their workforce to grow over the coming quarter. This compares to the UK-wide figure of 14.0%.

Scottish businesses are more prone to rising input and utility costs than average UK SMEs. The net balance of Scottish firms experiencing an annual increase in costs stood at 55.8% in Q2. This is broadly in line with the UK-wide figure, which stood at 53.2%.

This shared experience of growth in costs likely reflects base effects, whereby costs were reduced this time a year ago owing to the impacts of the initial lockdown measures and subsequent forced reduction in output.

The experience of Scottish businesses diverges from that of those in the UK-wide sample when considering the drivers of cost increases. Businesses in Scotland were particularly likely to see inputs and utilities as sources of cost pressure. The former was cited by 51.6% of businesses in Scotland and the latter by 34.7%. These figures compare to 42.5% and 27.6%, respectively, for the UK-wide sample.

On the other hand, small businesses in Scotland are less likely to cite labour costs than the average UK-small business. This corroborates with the findings related to employment, where Scottish businesses were one of only two areas to report a net fall in workforce size in Q2.

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scotland.policy@fsb.org.uk

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