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Scottish Economy

Businesses hope for some clarity and stability after recent political turmoil

It has been yet another turbulent few months for the UK economy, with recent political turmoil adding pressure to an already uncertain business environment.

Rising inflation coupled with significant political and economic uncertainty means many households and firms are facing increasingly tough financial decisions.

Recent estimates suggest the Scottish economy shrank by 0.2 per cent in July, the second consecutive month of negative growth, following no growth in the second quarter of 2022.

This was primarily driven by a fall of 0.3% in the services sector, which accounts for around two-thirds of the Scottish economy and tends to be the section of the economy most supported by consumer spending.

This was of little surprise, however. In our latest economic commentary, published in partnership with Deloitte, we forecast that the economy would contract from Q3 of this year, which is likely to persist until at least the first quarter of next year. The overall growth picture for 2023 is also forecast to be negative.

This means that Scotland is likely already at the start of a recession (defined as two quarters of negative growth in the economy).

This was similar to the UK economy, which shrank by 0.3% in August 2022 despite growth of 0.1% in the previous month.

Recent performances of private sector indexes suggest that the UK may have already been in a recession for the past few months, with significant falls in new orders and business confidence. The Bank of England’s view is also that the UK economy contracted in Q3.

Business confidence has hit significant lows with the majority of firms dealing with significant increases in costs, during a cost-of-living crisis in which household expenditure on non-essentials has fallen drastically.

Producer price inflation (PPI) measures the price of goods bought by UK manufacturers. The input PPI rate was still as high as 20% in the 12 months to September 2022, double the rate experienced by consumers. The fall in the price of crude oil had the largest downward effect on the input PPI rate, but the price of imported food materials kept overall input costs high.

October also marked the latest increase in the energy price cap. While capped by the UK Government’s energy price guarantee, households are still experiencing costs roughly double those of the year before.

However, prior to this autumn, firms have not been protected by the price cap and so have been incurring significant price hikes for energy for the entirety of this year. Some of the proposed energy price increases for businesses we have been engaging with have been truly eye-watering – and, in many cases, are putting the future of businesses at risk.

While the Government has announced “equivalent” support for businesses until the end of March, many businesses are unsure, as it stands, what they are paying for energy in October. Therefore clarity from energy companies – right now – is crucial.

The news that wholesale prices of gas are falling will be welcome to everyone. The System Average Price of Gas i.e. the value (in pounds) per kilowatt hour, was 55% lower on October 16 than at the beginning of the month. This is in part due to the fall in the price of wholesale gas, but more to do with increased supply of gas in the UK.

Supply-chain disruptions are continuing to ease but are still causing longer lead times for many firms, with the average transpacific eastern shipping container still taking around 30 days longer than pre-pandemic timings.

What businesses and households need now is a period of clarity and stability – the latter a popular word used by politicians in the last week.

New Prime Minister Rishi Sunak and his Chancellor will next month present their medium-term fiscal plan, which may give some clarity on the support for households and businesses – particularly on energy costs – after March next year. It is likely that this plan, underpinned by forecasts from the independent Office for Budget Responsibility, will set out the difficult and challenging fiscal environment over the next few years.

The Scottish Government had committed to setting out an Emergency Budget Review following the UK Government’s mini-budget on September 23. The Scottish Budget had been due to be delivered on December 15 but this might be delayed with the UK Government’s fiscal statement having been pushed back from October 31 to November 17. The Deputy First Minister is also likely to face a challenging environment.

In the coming weeks we will publish our Scottish Business Monitor results for the third quarter of 2022, which will help to assess how Scottish firms are coping in the current economic climate, but most importantly how this sentiment has changed given the past few months. We have also asked businesses what they think government – at all levels – can do to help them.

We will continue to explore how businesses are coping with the ongoing economic climate as we near the end of 2022 and will seek to understand what support firms need right now to survive through a difficult winter.

This article was published in The Herald on 27th October 2022.

Authors

Ben is an Associate at the Fraser of Allander Institute working across a number of projects areas including economic policy, social care and criminal justice.