FSB Scotland Small Business Index, Q4, 2019

SCOTLAND Q4 2019

SMALL BUSINESS INDEX

Scottish small businesses are some of the least confident in the UK. Confidence fell by 13.7 points compared to Q3 2019, to stand at -27.2 in Q4 2019. The only region where small businesses were less confident about the future was London, where the index fell to -36.4 this quarter. Despite this fall in confidence, year-on-year the Scottish confidence index climbed by 5.5 points, largely as the risk of a no-deal Brexit had faded compared to the final quarter of 2018.

Across the UK small business confidence fell by 13.5 points in Q4 to -21.6. The drop in UK-wide confidence leaves a gap of 5.6 points between the level of confidence recorded in Scotland and the UK average, a marginally larger gap than the 5.4 points in Q3. Initial estimates1 suggest an expansion of Scottish output of 0.3% in Q3, which is behind UK growth of 0.4%. The recovery from the contraction in output recorded in Q2 2019 (-0.2% growth across both Scotland and the UK as a whole) was largely driven by businesses reacting to uncertainty over how and when the UK would leave the EU. However, with further uncertainty, including the extension of negotiations with the EU in October, and the general election in December, growth seems to have slowed further in Q4. This is reflected in the outlook of small businesses across the country and especially in Scotland.

Scottish businesses continued to see gross profits fall in Q4. A net balance of -12.9% of small businesses in Scotland reported falling gross profits over the last three months of 2019. This is a decrease of 0.8 percentage points on the -12.1% net balance seen in Q2, when this question was last asked. The proportion of Scottish small businesses reporting falling profits has now consistently been higher than those reporting increasing profits since Q3 2015.

Despite the long running decline, year-on-year the net balance is up 5.4 percentage points, suggesting signs of improvement for some small businesses. This perhaps accounts for the slightly brighter profit forecast for the coming three months.

Small Business Confidence

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

Scottish small businesses were unable to maintain employment growth into Q4. The small business employment net balance was -4.0% in Q4 2019, following a 9.2 percentage point decline in the index compared to Q3. This means more small businesses in Scotland reduced their staff levels than increased them in the last quarter. This suggests the employment growth recorded in Q3 was something of an anomaly, since this was the only quarter since Q2 2017, when the net balance was above zero. Looking ahead, a net balance of just 0.8% of Scottish small businesses foresee employment levels expanding over the next 12 months.

This chimes with the latest official data for the Scottish labour market, which indicates that, in the three months to November, the total number of people in employment had fallen by 17,000 compared to the same period a year earlier. The employment rate in Scotland fell by 1.0 percentage points to 74.3% over the same period. Across the whole of the UK the employment rate stood at a record high of 76.3%.

Key cost pressures eased, but staff and utilities remain the biggest cost drivers. In the final quarter of 2019, the net balance of small businesses in Scotland that saw costs rise fell to 60.0%, from 73.3% in Q3. This brought the net balance in Scotland below the UK average of 61.3%. The proportion of small businesses feeling the pressure from rising utility costs rose by 6.7 percentage points to 39.8%. Meanwhile, the same share of businesses were experiencing rising labour costs, though this represents a 3.6 percentage point decline from Q3. In Q4 2019, small businesses in Scotland were also less likely to have seen the cost of inputs, fuel, the exchange rate or finance rising.

Behind some of these figures is the fact that the pound had gained strength since the likelihood of a no deal Brexit reduced in October. This will have cut costs for goods importers and helped to keep the pump price of fuel lower during Q4.

The share of small businesses in Scotland operating below capacity rose for the second consecutive quarter. In Q4 2019, the proportion of Scottish small businesses operating below capacity was 58.1%, an increase of 4.8 percentage points compared to the previous quarter. With 11.3% of small businesses operating above capacity over the same period, the net balance between businesses operating below capacity stood at 46.8%, an increase of 3.1% compared to Q3. Looking ahead, small businesses see prospects weakening, with the net balance of businesses in Scotland expecting to operate below their full capacity in the coming three months rising to 50.4%.

Summary

Economic growth has weakened across the UK after a volatile year in which Brexit led to swings in output and businesses struggled to cope with an uncertain future. Scottish businesses appear to have been affected particularly badly, leaving confidence among small firms in Scotland behind every other part of the UK except for London. The major symptoms of this low confidence are a combination of increased spare capacity and lower employment.

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

Net balance of firms reporting employment growth, Scotland