Scotland’s business activity up but Brexit still bites

Edinburgh's Princes Street

Business activity has risen in Scotland as the wider UK economy continues to reopen, with business sentiment continuing to improve through the second quarter of 2021.

That’s according to the latest Addleshaw Goddard Scottish Business Monitor report published in partnership with the University of Strathclyde’s Fraser of Allander Institute.

The report indicates that Scottish businesses are optimistic about their volume of business, employment levels and turnover over the next six months.

More than 500 Scottish firms responded to the survey, and the proportion of businesses confirming they have “somewhat or very high confidence that they will continue trading through the next six months” has risen from 82.6% in the final quarter of 2020 to 91.8% in the second quarter of 2021.

Accommodation and food services reported positive sentiment over the quarter for the first time since Q3 2019 and expectations for the next six months are the most optimistic since Q2 2014.

More than 37% of businesses reported an increase in debt by a moderate or large amount throughout the pandemic.

The outlook on growth in the Scottish economy has worsened slightly, with 17% of businesses expecting strong or very strong growth in the coming 12 months, compared to 25% of businesses in the previous quarter.

Firms trading with the EU continue to feel the aftermath of Brexit, with 70% reporting that they are experiencing a negative impact on their trade with the bloc since the end of the transition period, and only 2% reporting positive impacts.

About 38% of responding businesses reported that leaving the EU had negatively impacted their ability to fill vacancies — with 60% reporting that Brexit had no impact on their ability to fill vacancies.

Half of responding businesses currently had open vacancies to hire new staff, of which 77% said they were finding it difficult or very difficult to fill.

Accommodation and food services was the sector reporting the most difficulty in filling vacancies due to Brexit, with 60% reporting negative impacts.

This was followed by IT & Communications (46%) and Professional, Scientific and Technical (43%).

Most Scottish businesses continue to report that home working has had a negative impact on productivity, but just over 34% of businesses either have or will permanently reduce their office footprint.

In the long-term, businesses expect that almost two in three staff who previously only worked in the workplace will continue to do so — but over one in five staff will work part-time at home and part-time in the workplace, and around one in 10 staff will work from home full time.

Fraser of Allander Institute director Mairi Spowage said: “We are encouraged to see the increase in levels of activity across the board since Q1 2021, particularly within the hospitality and accommodation sectors which have arguably been the hardest hit throughout the pandemic.

“While restrictions have now eased, it is evident that firms are still cautious about the months ahead, with the outlook on growth in the Scottish economy less positive than in Q1.

“Given the turbulent 18 months we have experienced, it is unsurprising that firms are apprehensive.

“Businesses are aware that, with complications beyond the pandemic including the UK’s withdrawal from the EU, there will still be hurdles to overcome.

“That said, the latest results underline the positive direction in which we’re moving towards a strong economic recovery.”

Addi Spiers, Restructuring and Finance Partner at Addleshaw Goddard, said: “We’re now seeing more firms embrace some sort of normality.

“The latest results from our Business Monitor show that this, alongside the move to level 0, has brought further positivity in the volume of activity for Scottish companies.

“Recruitment and retention of staff remains a top priority for all sectors and movement in the market will continue well into the new year as firms pivot to new, more flexible ways of working – particularly as most adopt long-term hybrid working models.

“I am unsurprised at the spike in the number of firms taking on more debt, as many needed external financial security through the challenges the pandemic brought.

“However, now that the economic landscape is more settled, I suspect firms will continue to focus on trading improvements and strengthening their balance sheets.”

Other key findings of the Addleshaw Goddard Scottish Business Monitor report include:

  • The number of firms reporting an increase in their volume of business over the past three months was positive for the second quarter in a row, with many firms experiencing growth since the first quarter of 2021.
  • All sectors now have a positive net balance for the first time since Q2 2019.
  • The accommodation and food services sector reported the biggest increases with 54% of firms reporting a higher volume of business than the first three months of the year and only 8.3% reporting lower volume.
  • 51% of firms now expect to operate at normal or above normal levels of capacity over the next six months.
  • 42% of businesses reported that their debt burden had increased during the period of the pandemic, of which 43% said it had increased by a large amount, and 46% by a moderate amount.
  • Comparatively, 12% of reporting businesses said that their debt had decreased during the period of the pandemic, with 1 in 4 business saying that it had decreased by a large amount, and 55% reporting a moderate reduction.

Addleshaw Goddard and the Fraser of Allander Institute will launch a report highlighting the transport sector’s outlook as a continuation from the Scottish Business Monitor results, later this year.