Podcast: A Tentative Recovery for Scottish Business Sentiment?

Episode Summary

At the end of July we published our latest Scottish Business Monitor report, where we surveyed over 300 businesses across Scotland. Chirsty McFadyen is joined by Sanjam Suri to discuss.

Episode Notes

Transcript

00:00:08 Chirsty McFadyen

Hello and welcome to another episode of the Fraser of Allander podcast. My name is Chirsty McFadyen. I’m an economist at the Fraser of Allander Institute, and today I’ve got with me, my colleague Sanjam Suri. And would you like to introduce yourself?

00:00:21 Sanjam Suri

Hi, Chirsty. Yeah, my name is Sanjam Suri. I’m a knowledge exchange fellow at the Fraser of Allander Institute. I also lead the Scottish Business monitor. And I also do external and internal engagement knowledge exchange work with partners both within the university and outside the university.

00:00:39 Chirsty McFadyen

Thanks Sanjam. So today we’re going to be talking about the Scottish Business Monitor. Sanjam, do you want to give a bit of an overview of what the Scottish Business Monitor is for those who maybe aren’t aware of it?

00:00:50 Sanjam Suri

Yeah. So let’s just go back in time. It’s 1998. That’s when we actually started the Scottish Business Monitor. Fun fact, Scottish Business Monitor is actually older than Scottish Parliament because the first session of Scottish Parliament was actually in 1999. In this, this business monitor is basically a survey. And it’s an economic survey that’s meant to ask Scottish businesses on how the economy is doing, how they feel about the economy, how their cost structure is, how are they grappling with inflation. So we have a set of core questions. And then we have thematic ad hoc questions.

And given the history of the of the survey, what it does, it allows us to compare the sentiment in any given quarter and how it’s evolved over time. And the nice thing is that because we have such a rich set of historical data, we can always go back in time and compare. And it also allows a continuous time series of a survey. And that’s very interesting to look at because we can see, hey, this is 2025 Q2, which is what we’re going to be talking about right now.

And over the years, and we’re talking about over a lot of years since 1998, that’s how the survey is doing. What we saw is that during COVID, we asked pandemic specific questions. So for example, how are lockdown restrictions affecting your business? During Brexit, we’ve actually asked about Brexit specific questions.

So what the survey allows us to do is to have a regular set of questionnaires that we can track overtime. But then we also have the opportunity to ask thematic questions that might be very specific during specific times. So, for example, this quarter you asked about trade uncertainty with all the Trump tariffs that seem to be going on, off, on, off. So again, the survey allows us to do a bit of both.

00:02:44 Chirsty McFadyen

That’s great. Yeah, it’s a really useful source of data. Do you want to talk a bit about the types of businesses that respond to this by size and sector and and what the kind of sample size is?

00:02:54 Sanjam Suri

So the sample size varies across quarters, like the OS is discovering the samples like getting the right sample size is getting, has gotten, trickier with time, but we’ve still managed to somehow hit a right level that makes us really confident in the, in the findings that we circulate.

So I’ll give you an example. This quarter our survey was responded by more than 300 firms across all 32 local authorities. In fact, I’ve been leading this survey for last four quarters and across all four quarters we’ve at the very least, hit 300 firms, sometimes 350, sometimes north of that. Obviously, pre pandemic our response rate was much higher, but it’s still decent, although it does require greater e-mail nudging to get folks to participate, and we get the, the survey is open to businesses of all sorts. You can talk about your mom and pop own cafe on the local High Street. Or it could be a big multinational firm that’s operating in Scotland. We don’t target a certain size. Our survey goes out, it has a long reach. So there’s around 15,000 people when it comes to respondents.

So we don’t really target, but the the idea is that anyone that has a decent set of exposure to economic activity in Scotland, we want their voice to be heard.

00:04:28 Chirsty McFadyen

Thanks Sanjam, that’s really useful context for what we’re about to talk about, which is the latest Scottish Business Monitor report. So the survey for this latest report was done in June 2025 and it covered quarter 2 of 2025 and the report was released at the end of July. I had a look back at the report to remind myself of what the key findings were.

And in quarter 1 of this year, we actually saw a downward trend in business sentiment compared to 2024. Has this recovered in quarter 2?

00:04:58 Sanjam Suri

So I would characterise our current survey as a step in the right direction. The first quarter survey results were very, very bearish. Clearly, businesses had been impacted and were still digesting how much a hit to their operations and planning is going to be with the changes in National Insurance contributions. That’s the employer side of it. You know, the changes in the national living wage and businesses were still trying to assess how they’re going to change their operations because these changes were significant.

In fact, what we saw in the first quarter was we asked businesses, are you going to be impacted by the National Insurance contribution changes and less than 10% of businesses said that they will not be impacted. So what you’re trying to say is this, this impact was going to be broad as well as big.

Around 90% of businesses expected to be impacted. And what that translated was very weak levels and the businesses were very bearish when we asked them our standard questions.

This quarter, if you look at the quarter in isolation, you’ll think that the responses are still in the bearish territory, but taking a step back, they’re actually better than what they were in last quarter. So that’s why I characterised the survey as a step in the right direction and the language we use is tentative recovery. And the reason we call it tentative recovery, is even though the numbers may be negative, the direction is positive, so fingers crossed. If we see more durable improvement, we might be able to get you get rid of the words tentative recovery and be a bit more firm about durable improvement in business confidence.

00:06:50 Chirsty McFadyen

And you mentioned of course the changes to employer National Insurance contributions that kicked in this quarter. What kind of things have businesses been doing because of that and what kind of impact have we seen?

00:07:02 Sanjam Suri

So last quarter, we asked businesses what sort of strategies are you going to employ. It’s also worth noting that these strategies are not mutually exclusive, you know, so businesses may pass on the costs that increase costs to their customers if they can, but if you are in a competitive industry and your competitor has not increased prices, then you’re not going to increase prices. You know, you’ll reduce the hours your employees are working if you’re, if you were planning on giving them a raise, suddenly you may have second thoughts about it. So it’s a mixture of strategies. Last quarter, we asked businesses what they’re going to do.

And what we found out that 50% of businesses were planning on passing costs, increased cost to customers. So that’s basically inflation. And they were, 50% of businesses were also planning on either reducing employee hours, reducing plans to add headcount or just rationalising labour. Now, it’s worth noting that it’s, this is again not 50-50. You could basically employ a bunch of strategies to manage your costs, so it’s not one or the other that you either increase the cost, pass on all the rises to customers, or you reduce. Most businesses tend to do a bit of both and that’s where you know the rationalising comes in.

00:08:37 Chirsty McFadyen

Thanks, Sanjam. So we’ve talked a bit about businesses sentiment for the rest of 2025, but what about businesses sentiment for the following year?

00:08:48 Sanjam Suri

So, the last quarter, if I have to summarise, was better than first quarter, right? That’s, that’s what the data is telling us. That’s what the businesses are telling us.

Now, if indeed last quarter was better than the first quarter, then you should see business, businesses displaying more confidence about the next 12 month outlook.

And that’s where we’re still struggling and that’s where you know, we, we have to see whether this tentative sign of recovery leads to a durable improvement in business outlook. So what we saw is that you know, like when you ask businesses what do you think the growth in the economy over the next 12 month period, it’s going to be, around 73% or so still said it’s going to be weak or very weak, and one might say, well, that’s a lot of businesses and that’s, that’s true. But another way to look at it that this number was even higher in Q1. So the proportion of businesses who were saying that the economy is going to be weak or very weak has actually reduced from first quarter. So that’s a good sign. Although again having said that 73% still a very high number.

More crucially, we’ve also noticed an uptick in people who are saying growth is going to be moderate or stronger. So any migration that happens between very weak to weak, that doesn’t move the needle as much. But the biggest change is, you know, how many people are expecting growth to be moderate or something even better than moderate? So we’ll monitor this. You know, in our subsequent surveys.

And I think that is basically the most important, that’s, that’s in ultimately the million-dollar question. You know if growth is improving if businesses are showing better and each quarter is better than the quarter gone by then we should see signs of better economic growth outlook, but again that remains to be seen.

It may be that Q2 was a bit of an exception. Businesses were really bearish, it didn’t turn out to be as bad. So again, that’s why, you know, let’s, let’s call it a tentative recovery, let’s call it a green shoot. And let’s see whether a good quarter leads to subsequent better quarters and a durable improvement in business confidence.

00:11:26 Chirsty McFadyen

Thanks Sanjam and what kind of factors are contributing to the current business sentiment in Scotland?

00:11:32 Sanjam Suri

So you know, if you look back at some of the things that a business has to deal with, I mean interest rates, you know the cost of borrowing is a very traditional economic factor. You know, economic demand, you know is is a very, it’s something all businesses look at and they get impacted by it. But what we’ve seen basically since the last budget in the autumn when the Chancellor unveiled her budget is businesses are no longer regarding the most important determinant to be, you know, traditional macroeconomic factors like interest rates.

What they’re wanting is just economic and political certainty. That is the biggest call, you know, that’s their wish list. That’s their wish list on Christmas. That’s their wish list on Easter. That may be their wishlist in September is hey, you know, we know the Bank of England will do what it will do. Interest rate costs are what they are but what we want is political certainty so that’s, basically what the businesses are craving for is just political certainty.

00:12:50 Chirsty McFadyen

Thanks Sanjam. That’s been a really interesting chat and thank you very much for coming on to the podcast. We’ve got plenty of other podcast episodes on our channel if you’re looking for more information around what the Fraser does. You can also subscribe to our newsletter at fraservallendar.org and we will put the link to the full report of the Scottish Business Monitor in the description. Thanks for listening and we’ll see you next time.

00:13:15 Ben Cooper

Hello, 2025 marks a significant year for the Fraser of Allander Institute. Founded in 1975, the Institute celebrates 50 years of leading economic research in Scotland. Given this, we have a series of exciting events and content planned for the remainder of this year to mark this milestone.

This includes our anniversary conference on the 18th and 19th of September this year at the University of Strathclyde’s Technology and Innovation Centre. We have a number of speakers and themed sessions planned for the day in order to highlight the breadth and importance of the Economic Research being conducted across Scotland.

As well as this we have a number of other events planned, including our reception at the Scottish Parliament in December and one at the Scotland Office in London in October.

You’ll also see some unique content published in the coming months, including a podcast series with past institute directors and some articles on the history of the Institute, as well as some other eye-catching covers from some of our reports from over the years in the coming months.

In order to be kept up to date with any of these events and to be the first to know about our 50th anniversary publications, visit our website, fraserofallander.org and you can join our mailing list.

If you are interested in engaging with us also, whether you previously work for or with the institute, why not get in touch? We have a designated 50th anniversary e-mail fraser50@strath.ac.uk. We hope you’re as excited as we are and look forward to celebrating this exciting milestone with as many of you as possible.