Scottish business confidence has moved into positive territory for the first time since March 2022, according to the latest ICAEW Business Confidence Monitor report for Scotland.
Based on findings from Q2 2023, the Business Confidence Index is now broadly in line with the UK average. This does, however, remain weak; with Scottish companies concerned about the impact of high inflation and interest rates on future sales.
The improvement in confidence is mainly driven by strong domestic sales and export growth being the highest of all regions and nations at a healthy 5.5%, albeit projected sales growth is not expected to remain as strong for the rest of the year.
Whilst regulatory challenges - particularly in banking, finance and insurance - remain a key concern, the increased tax burden has become a more prominent challenge this quarter, mainly due to the increase in Corporation Tax rates from 19% to 25% which came into effect on 1 April this year, hence this is the first quarter that these new rates apply.
Bank charges are another prominent challenge highlighted this quarter, whilst other challenges cited by businesses include late payments and increasing competition in the marketplace.
The report also contains some positive news about the labour market, with workforces continuing to grow and the availability of management skills increasing. Whilst Scottish business expects this growth to continue for the remainder of the year, there is also anticipation that this growth will slow down in line with sales and exports.
Costs continue to be a challenge for Scottish businesses mostly due to general wages and price increases that are affecting the entire economy. As a result, input prices are increasing at their highest rate since 2004, although there is an expectation this will slow down over the months ahead. Likewise, salary growth is currently well above historical averages but is also expected to slow in the coming year.
This all impacts selling prices which are rising sharply at present but are anticipated to increase at a slower rate from next year.
Scottish business is expecting profits to increase this year despite the increasing cost pressures, reflecting a positive outlook on the bottom line.
Capital Investment has increased in line with the UK average at 2.6% and it is felt that this is being suppressed by weak confidence and spare capacity.
Over the next 12 months, the report suggests Scottish businesses plan to invest at a higher rate than other UK regions and nations mainly driven by the financial sector and increased Research & Development budgets.
There are many competing factors influencing business confidence at present, some of which can be controlled and some outside of our influence, hence it continues to be important to focus on those areas you can influence or control and plan carefully around these. This should enable your business to maintain profitability levels in anticipation of cost pressures reducing over the coming year.
With the increased tax burden having an impact on business confidence, it is important for business owners to ensure they are paying the correct amount of tax – maximising available reliefs such as capital allowances and Research & Development Tax Credits. You should also be aware of the impact controlling more than one company can have on the tax rates.