Scottish business confidence has risen into positive territory for the first time in a year, according to the new Business Confidence Monitor for the Institute of Chartered Accountants in England and Wales (ICAEW). 

The second quarter of 2023 saw most regions in the UK finally out of the red in terms of confidence, with Scotland scoring a 6.4, up from -0.2 in the first quarter of the year.

Contributing to this is Scotland’s export growth, the highest in the UK, as well as its domestic sales, which saw an increase of 5.6%, one of the biggest in the country, beating the national average of 4.9%.

Despite this positivity, Scotland continues to face the same challenges as much of the UK, with businesses and consumers alike suffering from high inflation rates, soaring energy costs, and an economy shrouded in uncertainty.

ICAEW surveyed its members across the country to assess current business attitudes and outlooks for the coming quarter. While sales in Scotland likely contributed to the growth in confidence, both Scotland and London expect domestic and international trade to slow in the next quarter.

The problem of inflation was also projected to increase in Scotland, further squeezing businesses.

Business Challenges 

As confidence recovers, businesses were found to face different challenges than a year ago – regulatory challenges are now the most widely-cited, at 44%.

Concerns about the tax burden have risen to 34%, up from 30% in the previous quarter and reaching a historical high, likely reflecting the corporation tax hike to 25% which came into effect in April.

A growing proportion of Scottish businesses also cited bank charges as a challenge – this figure surged to 24% from 9% in the previous quarter.

Scottish Labour Market

Businesses expanded their workforce in Q2 2023, with employment expanding by 3.3%. Scottish businesses expect to grow employment by 2.6% over the coming year, continuing a pattern over the past year.

For IT and communication companies, salaries high a record high in Q2, reflecting their need for highly skilled people. The pace of salary growth is expected to weaken over the next 12 months, but only slightly when compared with the pattern seen in input and selling price inflation.

Despite efforts to expand workforces, the proportion of businesses citing staff turnover as a growing challenge remains above the historical average.

Input Price and Investment

While annual input price inflation is at a record high, Scottish businesses expect a slowdown over the next year. The cost environment remains difficult for Scotland – high raw energy and commodity costs initially drove inflation, which is now increasingly the result of a more generalised wage and price rise across the economy.

Salary growth is currently at 4.2%, well above the historical average of 2.0%, and is also expected to ease in the next year.

A similar pattern is predicted for selling prices, which have continued a sharp rise in Q2 of 4.3%, the highest increase in Scotland since 2004. Selling price gains are expected to be more modest by next year, as input cost pressures ease.

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Profits are expected to continue their rise, as Scottish businesses are confident about maintaining the current rate of growth next year, of 5% for the next 12 months.

Further, capital investment is up by 2.6% this quarter, similar to the UK average. Companies expect a 2.9% boost in the 12 months ahead, however, higher than in any other UK region or nation, and led by the banking, finance, and insurance sector.

Research and Development budgets are also growing at the highest rate in the UK at 2.8%, but are expected to slow to 2.5% next year.

What About Small Business?

Despite a growth of confidence in Scotland as a whole, the Federation of Small Business‘s (FSB) has found Small and Medium Enterprise (SME) confidence has slumped in the second quarter of 2023.

The FSM Index dropped to minus 14.2 points in the second quarter, down 11.4 points in the first quarter of the year, a dramatic shift to a pessimistic economic outlook.

However, each sector reacted differently: confidence among wholesale and retail firms declining by 12.6 points, and professional, scientific and technical firms being the only major sector to reach positive territory, hitting 7.8 points.

Only 47% of small businesses surveyed by FSB plan to grow over the next year, with 89% of SMEs reporting higher costs compared to a year ago.

A major reason for this could be a struggle to access finance: just 45% of SME’s financial applications were successful in Q2.