High confidence and growth in Scottish business activity were reported in two recent economic studies.
This month saw the publication of the ICAEW Business Confidence Monitor (BCM): Scotland for Q3 2021 and the Royal Bank of Scotland (RBS) PMI for September 21, the results of both being largely positive.
The BCM reports that business confidence in Scotland is very high by historical standards, although slightly less optimistic than the UK average. It also reports that both domestic sales and exports are expected to rebound sharply in the year ahead, that businesses are planning to start hiring, with salary growth expected to rise. This in turn is generating its own challenges in respect of staff turnover and skills availability.
Concerning pricing, unsurprisingly input prices are rising albeit at rates similar to pre-pandemic norms and businesses are in turn passing these on to their customers.
The RBS report highlights a sharp uplift in business activity during September as a result of inflows of new work.
Scottish companies are, however, experiencing severe inflationary pressures through increased costs of fuel, materials and staff costs, combined with shortages and logistical issues. This is, in turn, resulting in a sharp increase in prices charged to customers.
The issues with availability of materials, price volatility, logistics and staffing have been widely reported hence do not come as a surprise. It is, however, encouraging to see that business confidence is high and that Scottish business is optimistic about the future.
What does this mean for Scottish businesses?
With inflows of new work to the Scottish private sector rising due to increased client demand, firms across Scotland are experiencing some optimism. As a result, there has been an upturn in staffing levels as a consequence along with an acceleration in the creation of new jobs.
The downside of this is that there is high competition in the jobs market, leading to wage inflation and shortages of people across sectors.
Rising costs and prices
Earlier in this year, there had been a temptation to reduce prices to cope with falling demand and retain market share, a strategy that we advised against in most cases. As we have moved later into 2021 the market has seen a rise in input costs due to increasing materials, fuel and wage costs and, as a result, an increase in average selling prices as these have been passed through, hence that temptation seems to have subsided.
These costs, according to the RBS report, have risen most steeply in manufacturing, resulting in rapidly increasing inflation.
Innovation and capital investment
The ICAEW report states that 65% of Scottish businesses were operating at below capacity at the end of 2020 with the figure falling to 44% at the end of September 2021, mainly as a result of the reopening of the economy.
The consequence of this decline in spare capacity is an increase in plans to invest in capital and research and development (R&D) as well as increases in headcount and people development budgets.
Reasons to be cheerful?
Scottish business now finds itself in a tricky position – reasons to be cheerful in that customer demand is there and not falling away, but increasing costs along with lack of availability of materials and skills to deliver upon these.
As ever, there may be an opportunity to innovate and may well lead to businesses thinking about how they deliver goods and services, how they deal with supply chain issues and how they attract and retain the best people.
There are currently tax incentives to engage in such investment activity with the availability of enhanced Capital Allowances and R&D Tax Credits, as well as a number of organisations who specialise in supporting innovation in business – support which could be key to addressing some of these challenges.
There are also real opportunities for businesses to stand out both in terms of recruitment and retention – how you recruit, develop and retain the best people in a challenging market, and make the most of people development budgets.
There may also be a move to outsource those functions that are not core to the business, and where similar recruitment challenges are faced. For example, it may become more cost-effective to outsource a finance function, or parts thereof, due to competition in that market, and this, in turn, will provide opportunity for the accountancy market, whilst removing a recruitment and retention issue for that business.
A perfect storm
So many moving parts and an optimistic outlook for the foreseeable future will surely provide a unique set of challenges for Scottish businesses, and perhaps in how we view certain aspects of what we do.
The message is simple though – control what you can and leave yourself capacity to deal with everything else.
ICAEW Business Confidence Monitor (BCM) Scotland
RBS UK Small Business PMI