FSB Scotland Small Business Index, Q1, 2021

SCOTLAND Q1 2021

SMALL BUSINESS INDEX

Businesses in Scotland saw a leap in confidence in Q1, despite being amongst the least optimistic in the UK, according to the latest FSB Small Business Index. Confidence among Scottish small businesses improved by 87.8 points between Q4 2020 and Q1 2021, reaching a reading of 18.8. This stark improvement, as firms look ahead to Q2, comes amidst a rapidly changing landscape, with the upcoming lifting of restriction measures set to induce an uptick in economic activity. The 87.8-point improvement witnessed in Scotland was the second largest amongst the UK’s regions and nations. It is surpassed only by the 95.7-point increase amongst businesses in the North West of England.

Despite this large-scale rise, however, businesses in Scotland remain among the UK’s least optimistic.

Scotland’s reading of 18.8 stands as the second lowest, undercut solely by that of London, which has a value of 13.5. One possible explanation concerns Scotland’s relatively slower path out of lockdown, with the Scottish Government set to lift restrictions on non-essential retail and hospitality at a later date than their Westminster counterparts. As such, though an improvement in economic conditions is anticipated, this could be more muted than that witnessed across the rest of Great Britain, at least in the short term.

Planned reopening of the economy brings a wave of optimism across UK SMEs. 2021’s first edition of the Small Business Index has brought a significant improvement. The headline UK reading has picked up to 27.3, having stood at -49.3 in Q1 2021. This is the highest SBI reading since Q2 2015. This improvement was mirrored across the UK’s regions and nations, with all readings flipping from negative to positive territory.

Scottish businesses saw the UK’s worst revenue performance in Q1. In stark contrast to businesses’ optimism when looking ahead to Q2, the experience of Q1 has been overwhelmingly negative. With much of the economy being subject to Covid restrictions, businesses have once again suffered from curtailed revenue streams. Nowhere has this been more evident than in Scotland, where a net balance of -45.0% of SMEs reported revenue growth. This stands as the weakest reading of all the UK’s regions and nations. Within this figure, 63.0% of Scottish SMEs saw their revenue levels fall in Q1, again worst result of any region or nation.

The optimism around overall economic conditions looking ahead to Q2 can be seen, however, in expectations of revenue. Half (50.0%) of SMEs in Scotland anticipate revenue growth in the coming quarter.

Scottish SMEs see improvement in growth aspirations. Since the onset of the coronavirus crisis, businesses’ growth aspirations have taken a significant hit. Indeed, many businesses have downsized amidst the pandemic, cutting their staff levels in response to weaker revenue streams in an attempt to stay afloat. Q1 2021 brings a reversal of this sentiment, however, with businesses’ hopes being lifted in response to the planned reopening of the economy. In Scotland, a net balance of 29.0% of SMEs expect to grow over the coming year, marking a stark contrast to the mere 6.0% of businesses reporting such expectations in Q4 2020.

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

Scottish businesses are most likely to anticipate closure. As was also the case in Q4 2020, Scottish SMEs are the most likely to expect business closures over the coming year, with 4.8% anticipating closing their doors for good in the next 12 months. This figure is significantly higher than the UK-wide average of 1.9%, reflecting the lower levels of optimism within the business community in Scotland.

Workforce cuts amongst Scottish businesses were less prominent in Q1 2021 than in Q4 2020. Staff numbers were more stable in Q1 2021 than in Q4 2020, with the net balance of Scottish SMEs reporting growth in employee numbers reaching -3.8%, up from -21.0%. This resilience is likely to be largely explained by the success of the furlough scheme in ‘freezing’ the UK labour market.

Indeed, the latest ONS figures point to a dip in the unemployment rate in the three months to January. Businesses in Scotland have been amongst the most significant users of the furlough scheme in early 2021, with 15.0% of eligible employees being partially or fully furloughed as at the end of February. This proportion is exceeded only by businesses in London, the South East, and South West.

Looking ahead to the quarter, a net balance of 10.0% of Scottish SMEs anticipate growth in employee numbers. Again, this reflects the expectation of resurgent economic activity as restrictions are eased, requiring a greater degree of labour inputs.

Scottish businesses are more prone to rising utility and fuel costs than the average UK SME. The net balance of Scottish firms experiencing an increase in costs in Q1 stood at 13.7%, down from the 28.3% figure recorded in Q4 2020.

Inputs represented the most common source of year-on-year cost increases amongst UK SMEs in Q1 2021, being selected by 30.1% of survey respondents. This was the same in Scotland, with more businesses citing input costs than any other category. Indeed, the proportion was even higher than the UK-wide figure, at 34.8%.

Scottish businesses remain more likely to cite utilities as a source of rising costs, with this being reported by 33.3% of SMEs in Scotland compared to just 25.2% across the UK as a whole. Recovering commodity prices and improved demand conditions have contributed to a rise in wholesale gas and electricity prices in recent months. These factors also contribute to fuel costs, which were the third most commonly cited source of rising costs for Scottish SMEs, being selected by 26.1%. This proportion also outweighed the UK-wide equivalent of 19.3%.

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