Fraser of Allander: improvement in consumer sentiment

Mairi Spowage

The latest Deloitte-sponsored quarterly Economic Commentary from the Fraser of Allander Institute (FAI) at Strathclyde University shows that the Scottish economy “is likely to be recovering hesitantly as expected, following the contractions in growth in the final part of 2023.”

The University of Strathclyde researchers have set out their latest forecasts for the Scottish economy.

The economists are forecasting growth of 0.6% in 2024, 1.1% in 2025 and 1.2% in 2026.  These forecasts are unchanged from the previous assessment.

“In Scotland, consumer sentiment has risen 4.8 points over the last quarter and 23 points over the year, indicating a significant improvement in sentiment across Scotland,” said the FAI.

“However, most indicators remain in negative territory (i.e. more people being negative than positive about their circumstances) reflecting the challenging economic and financial pressures facing households.”

The latest assessment from the Fraser of Allander includes a real-time earnings tracker, a focus on the implications of the changes to the national minimum wage being introduced in April 2024, and an analysis of the major public policy priorities for citizens in Scotland.

These include health care and the NHS, inequality & poverty, housing and cost of living.

Professor Mairi Spowage, Director of the Institute, said: “The mixed bag of economic news we are seeing for both Scotland and the UK at the moment could give reasons for either pessimism or optimism.

“On the one hand, the economy returning to growth in January and inflation falling faster than expected support our view that we will return to growth in 2024 overall.

“On the other hand, this growth is fragile and may be blown off course by events, particularly given geopolitical uncertainty this year.

“Our report chimes with other data released today by the Scottish Chambers of Commerce, which also shows businesses displaying confidence and resilience in the face of challenges.”

Douglas Farish, Head of Tax for Scotland at Deloitte, said “Although it’s encouraging that Scotland avoided a technical recession in the latter half of last year, this quarter’s Economic Commentary still paints an ambivalent view of the nation’s current economic position, with overall growth lacklustre in 2023.

“The cost-of-living crisis continues to take a toll on household finances, and our latest State of the State report found that 60 per cent of the Scottish public believe the crisis will get worse still, albeit dropping from 75 per cent last year.“

João Sousa, Deputy Director of the Institute, said: “The lack of significant changes on resource and capital departmental spending further confirms the tough fiscal environment for the Scottish Government, and this will become apparent again when Deputy First Minister Shona Robison presents the Medium-Term Financial Strategy (MTFS) on 30 May.

“The 2023 MTFS had a £2.4 billion shortfall in funding built in for 2025-26, and with so much of the £1.5 billion shortfall in 2024-25 being filled by delaying projects, more difficult decisions are likely to be on the way.

“This is not to say that the Scottish Government will not receive any additional spending consequentials from the UK Budget on 6th March. £295m in Barnett consequentials was generated for 2024-25 from the chancellor’s announcements.”

Meanwhile, the latest quarterly economic indicator from the Scottish Chambers of Commerce (SCC) said Q1 has seen a significant downturn in cashflow and profits, with “sizeable contractions recorded across four of the five sectors.”

This SCC survey was conducted from February 12 to March 11, 2024, with 400 firms responded to the Q1 2024 edition of the survey.

About 97% of respondents to the survey were SMEs — businesses with fewer than 250 employees.

The SCC said more businesses are reporting challenges in recruiting staff, increasing to 47% for the quarter compared to 40% in the last quarter. However, recruitment intentions remain stable for the next quarter.

It said more firms are indicating that they will raise prices this quarter compared to last, rising by 10 percentage points to 50% of all firms.

The leading cost pressures remain labour costs (76%), energy costs (60%) and raw material prices (44%), with more companies raising concerns specifically on labour and energy costs.

Over half of firms have reported investment freezes and do not expect this to change next quarter due to economic uncertainty.

Scottish Chambers of Commerce president Stephen Leckie said: “The latest insights from Scottish business underscores the extreme cost pressures facing companies in all sectors. The persistently high cost of doing business is hammering cashflow and profitability which will hit the economy in the long-term.

“The operating environment – nationally and globally – is exceptionally challenging.

“Geopolitics has moved up the agenda in boardrooms underlining the critical role governments will continue to play to ensure smooth trading conditions. Red Sea disruption, unresolved global conflicts and emerging concerns on data sovereignty are live issues businesses and communities require clarity on.

“Despite this, Scottish businesses are showing signs of resilience with business confidence and recruitment intentions remaining stable for the next quarter.”

On tax, Leckie said: “Closer to home, businesses continue to express major dissatisfaction with tax policy direction from Scottish and UK Governments.

“Businesses are concerned about the impact of income tax divergence between Scotland and rest of UK in attracting and retaining talent. Scotland’s additional regulations such as the tourism tax is also a cause for concern which is increasing the cost of doing business.

“The message from businesses is clear: we need Governments north and south of the border to reduce the tax burden.”

On the labour market, Leckie said: “More businesses are struggling to find and secure the skills and talent they need with recruitment difficulties significantly increasing over the quarter.

“The planned increase in the national minimum wage, whilst welcome for workers, will heap extra costs on the most vulnerable sectors such as hospitality and leisure explaining why labour costs is the number one cost pressure this quarter.

“Changes to the UK immigration system also threaten to harm Scotland’s attractiveness, with a planned 50% rise in the minimum salary threshold for a Skilled Worker visa from April.

“This policy alone will make it impossible for many Scottish businesses to hire international staff as the salary threshold is far higher than Scotland’s average wage. The UK Government must adopt a business-friendly approach which aligns with Scotland’s economic needs.”

On investment, Leckie said: “Investment remains a significant cause for concern. Over half of firms have reported investment freezes and do not expect this to change next quarter due to economic uncertainty.

“The challenges highlighted in the survey are a perfect storm impacting investment decisions: recruitment challenges, tax burdens, weak cashflow and declining profits.

“Firms needs a clear framework to attract capital investment in areas such as housing. This should also include reducing regulatory burdens, quicker planning decisions and targeted incentives.”