FSB Scotland Small Business Index, Q4, 2020

SCOTLAND Q4 2020

SMALL BUSINESS INDEX

Businesses in Scotland were the UK’s most pessimistic in Q4 2020, according to the latest FSB Small Business Index.

Survey work that was carried out between 14th and 21st December 2020 shows that small business confidence slipped to -69.0 in Q4, the second-lowest reading on record.

Though business pessimism was found across the UK’s regions and nations in Q4, the results from Scotland are stark. Not only was the Index reading of -69.0 the lowest score across all regions and nations, Scotland also suffered the largest fall in the Index between Q3 and Q4, amounting to a decrease of 42.7 points. This represents a significant shift as Scotland had previously stood as one of the least pessimistic areas in Q3.

New Covid trading restrictions pose considerable barriers to business activity across the UK. As the rate of Covid-19 infections increased over the course of Q4, a wave of new restrictions on businesses were implemented throughout the UK, severely damaging the outlook for businesses. This has manifested in a large fall in the UK-wide SBI, reaching -49.3, down from -32.6 in Q3. The figures for Scotland reflect the fact that much of the central belt was subject to additional regional restrictions from early October, followed by much tighter measures implemented across the entire nation later in the quarter.

Scottish businesses saw the UK’s worst gross profit performance in Q4. The net balance of Scottish firms reporting gross profit growth stood at -51.1% in Q4. This is significantly lower than the UK-wide average of -38.8% and, indeed, represents a lower score than any other UK region or nation.

Given the link between short-term financial performance and overall business confidence, it comes as little surprise to see Scotland rank the lowest on both the headline Index and gross profit measure. Within the net balance figure, more than two thirds (67.0%) of SMEs in Scotland saw their gross profit levels decline in the final quarter of 2020. Such weakened profits reflect the disruption to business activity induced by the pandemic and associated restriction measures. The financial impact has been most pronounced amongst service-based industries reliant on face-to-face contact. As in the spring of 2020, hospitality represents one of the worst hit sectors, with businesses in Scotland being particularly affected by policies such as the 6 pm curfew and a ban on alcohol sales, implemented in certain localities from early October, as well as the outright closure of venues under subsequent tighter sets of restrictions.

Scottish businesses have the weakest growth expectations. A net balance of 6.0% of Scottish businesses expect to upscale in the coming 12 months, representing the lowest figure across the UK and standing well below the UK-wide average of 18.2%. The negative growth outlook is further compounded by the fact that businesses in Scotland are the most likely to anticipate permanent closure in the near future. 6.0% of Scottish businesses expect to close their doors for good over the coming year, 1.7 percentage points above the UK-wide average.

Small Business Confidence

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

Scottish businesses cut their workforces at a faster rate than UKaverage in Q4. Having stood at -13.5% in Q3, the net balance of Scottish firms increasing the size of their workforce slipped further in Q4, reaching -21.0%. This suggests that Scottish businesses reduced employee numbers at a faster rate than businesses across the UK as a whole, with the UK-wide net balance figure standing at -15.5%.

Indeed, only businesses in London (-22.6%) exhibited a lower net balance than Scotland. In terms of the outlook for Q1 of 2021, Scottish firms are significantly more pessimistic than the rest of the country, with a forward-looking net balance figure of -16.7% compared to a UK average of -3.8%.

With profit levels subdued, businesses will be looking to cut down on variable costs in order to protect margins. This not only translates into a desire to reduce labour costs, but broader input costs too – a category cited as a source of cost pressure by 38.9% of Scottish businesses in Q4.

The net balance of Scottish firms experiencing an increase in costs in Q4 stood at 28.3%, an unchanged figure from Q3 – with input costs the most frequently cited cost amongst Scottish businesses.

Meanwhile, the proportion of businesses citing costs of regulation remained elevated, at 33.3%, up from 29.0% in Q3. Relative to their UK-wide counterparts, Scottish businesses were particularly likely to cite the utilities category. A third of Scottish businesses (34.1%) saw cost changes from utilities in Q4 compared to just 22.7% of businesses across the UK as a whole.

Spare capacity is still prevalent amongst Scottish businesses in Q4. In a further reflection of changing levels of economic activity between Q3 and Q4, the proportion of Scottish businesses reporting below capacity operations increased by 4.3 points, reaching 75.7%. This figure was somewhat greater than the UK-wide average of 71.6%.

Looking ahead to Q1 2021, Scottish businesses again anticipate spare capacity to be more pervasive than the average UK business. 75.6% of those in Scotland expect below capacity operations in the first quarter of 2021, compared to 70.5% of businesses UK-wide. With a figure of 76.6%, only businesses in the West Midlands envisage having greater spare capacity.

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