SCOTLAND Q3 2017 SMALL BUSINESS INDEX
Small business confidence has declined in Scotland, in common with the rest of the UK. The Small Business Index stands at -15.2 points in Scotland for Q3 2017, falling from -3.8 points in the previous quarter. The Scottish index has been in negative territory for seven consecutive quarters.
Scottish confidence continues to lag behind the UK average, despite outperforming on GDP growth in Q1 2017. The Scottish economy grew by 0.8% over Q1 2017, compared to growth of 0.2% across the UK as a whole. Growth was largely driven by the manufacturing sector and exports, while a fall in construction activity weighed on the headline figure. The decline in small business confidence may suggest that the relatively strong Q1 GDP performance may be difficult to sustain. UK small business confidence has fallen sharply. The UK-wide Small Business Index stands at +1.1 points in Q3 2017, 13.9 points below the Q2 level. The most recent downtick in confidence likely reflects the UK’s unimpressive economic performance over the first half of the year. Quarter-on-quarter GDP growth stood at 0.2% in the first three months of the year and accelerated only slightly to 0.3% in Q2. In the three months to June, growth was driven by a partial recovery in the services sector while production and construction both contracted. The anaemic growth rates seen over 2017 thus far are in sharp contrast to the end of 2016 when consumer spending and investment expenditure propelled growth.
Profits drop but are expected to improve. A net balance of 6.7% of Scottish small businesses reported a fall in gross profits over the past three months. This is an improvement from Q2 when 16.0% of small businesses reported a decline. Expectations are better for the next quarter, however, with businesses on average expecting profits to neither rise or fall.
Across the UK, expectations for profit growth in the next quarter were more positive. The optimism was driven mostly by the manufacturing sector and stifled by construction. The dip in reported profit growth in past quarters was largely driven by a weakening currency position increasing the cost of imported goods; the subsequent recovery may be related to the stabilisation of the pound.
Scottish small businesses report a decline in exports. A net balance of 20% of small businesses reported that export values had fallen over the past three months. This matches recent Scottish government statistics which show that international exports from small businesses decreased by £510m (9.6%). Encouragingly, however, a net balance of 5% expect export values to increase over the next three months.
In line with falling confidence, small businesses in Scotland report falling employment. A net balance of 1% of small businesses in Scotland reported reduced employment in the third quarter of 2017, compared to a 1% net balance reporting employment growth in the previous quarter. The outlook over the next three months is not any brighter with a net balance of 4% of small firms expecting to reduce headcounts.
This decline contrasts with ONS data on total Scottish employment, which show that the unemployment rate fell to 3.9% in Q2 2017, from 4.4% in the previous quarter. In this respect, Scotland is outperforming the UK as a whole, with the unemployment rate falling from 4.7% in Q1 2017 to 4.5% in the second quarter. The index suggests that small businesses expect to reduce employment, possibly suggesting firms may be lowering staff costs in an attempt to protect squeezed margins.
Input costs represent a growing concern. Though concerns about the domestic economy and consumer demand are the main perceived barriers to growth, an increased number of firms now consider input costs a barrier to growth compared to a year earlier. In contrast, fewer firms consider fuel costs an obstacle to growth in Q3 2017 than did in Q3 2016. Worries about access to finance have also faded as the Bank of England maintains its accommodative monetary policy stance.
Investment intentions strengthen but lag behind the rest of the UK. A net balance of 7% of small businesses in Scotland intend to increase their investment over the next quarter, up from 6% in Q2, but still far behind the UK average of 14%. The uptick in investment intensions marks an end to the consistent downward trend seen over the past year, an encouraging development for the Scottish economy.
The Small Business Index highlights a tough outlook for Scotland. With the Small Business Index remaining in negative territory, the country’s economic outlook is still fragile. Although the unemployment rate is lower than the UK average and Scottish GDP growth outstripped that of the UK in Q1, Scottish businesses confidence remains subdued.
Faced with growing worries about costs and a weak domestic economy, small businesses could reduce the number of people they employ over the next quarter. Nevertheless, there may be better times ahead as small businesses see healthier profit margins and robust capital investment levels.
Net balance of firms reporting employment growth, Scotland