FAI Publications, Scottish Economy

Scottish business display cautious optimism as the economy starts to recover

Latest survey results positive, but the business base are – and should be – cautious about future obstacles to growth  

The Scottish economy is taking tentative steps towards recovery. Supported by the further relaxation of restrictions, the economy grew 0.9% in May: and is now 2.7% below pre-pandemic levels. Accommodation and food services contributed the most to growth as they were able to operate more freely, albeit with constrained capacity.

This macro picture may not always chime with individual businesses and how they feel about the economy. So, we also regularly survey businesses to see how they are faring and what they make of the state of the economy.

The Fraser of Allander Scottish Business Monitor, in partnership with Addleshaw Goddard, is a quarterly survey of around 500 Scottish businesses. It has been running since 1998, and allows us to gauge sentiment ahead of official measures of the Scottish economy, and explore topical policy issues to help inform our regular economic commentary.

Our survey results, published yesterday, show that business sentiment continued to improve in the second quarter of 2021. Volume of business, employment and turnover metrics continued to be positive for the second quarter in a row.

The volume of business over the quarter for accommodation and food services is positive for the first time since Q3 2019 and expectations over the next six months are the most optimistic since Q2 2014.

This situation, whilst heartening, feels rather fragile. There are a number of challenges, both in the short term and in the medium to long term.

Firstly, we can’t forget that this current situation is being financed by huge amounts of government borrowing and/or government backed loans. So what might happen in the economy when this scaffolding is removed?

The most high profile and widely used measure has been the Job Retention Scheme. As at the end of May, over 170,000 employments in Scotland were still on furlough. The largest single sector is accommodation and food services, but there are significant numbers across all sectors, with a large proportion of those in arts, entertainment and recreation also on furlough.

At the start of this month, the scheme started to become less generous, with employers having to pay 10% of the salary of employees on furlough from 1st July. This will continue to increase, before – on current plans at least – the scheme is phased out completely at the end of September.

There is no doubt that this scheme has helped significantly to protect jobs throughout the pandemic:  unemployment is likely to peak at around 5.5% in the Autumn. If this bears out, it will be the highest unemployment rate since 2016, but it is much lower than some of the direst predictions we were seeing during the first lockdown.

As well as being funded by government debt, survival throughout the last 16 months has undoubtedly been financed by an increase in the debt burden of businesses. Our survey showed that 42% of businesses had increased their debt burden throughout the pandemic, with only 12% decreasing. The resilience of the business base will therefore be tested when cost pressures go back to more normal levels.

Inflationary pressures are also causing concern, with the price of some inputs soaring.  70% of businesses expect the price of their inputs to increase more than normal over the next 6 months. In our discussions with businesses, it is clear that both the scarcity and price of particular components and materials is putting a serious handbrake on taking on and starting new business.

The changes in many people’s working habits over the course of the pandemic has led to an acceleration of the adoption of technology and embracing more flexible working practices.

Businesses are a little mixed on their view of home working and the impacts on their business. They mostly agree that adoption of new technology has helped productivity, but that overall productivity has been negatively impacted by homeworking.  Of particular concern is the impact on collaboration and innovation.

How much of this will stick? Around a third of businesses plan to permanently reduce their office footprint.  However, time will tell about the effectiveness of a hybrid model of working once we move beyond level zero.

This all has knock on implications for the future of our town and city centres. Significant multiplier effects are generated by commuter spending, particularly in our biggest cities.

The flip side of concerns over future unemployment is of course the challenges employers are encountering as they try to fill vacancies. 77% of business who are currently trying to recruit told us they are finding it difficult to find the people they need – mainly due to a lack of skills or experience.

Some businesses felt that the UK’s exit from the EU transition period had impacted their ability to fill vacancies. More broadly, 70% of those who trade with the EU felt that the exit from the transition period had impacted negatively on their trade, with only 2% saying it has been positive. We will see how these figures evolve as processes become more bedded in as we move through the year.

Lifting our eyes to the longer term, where will growth come from when the economy is fully open and operating normally? The long term economic challenges that faced Scotland before the pandemic have not gone away, and many have been exacerbated by the pandemic.

It is in this context that the Scottish Government’s new Council for Economic Transformation had its first meeting last week. This group, a key commitment by the new Scottish Government, has been tasked with advising the Government on a new 10 year strategy to “unleash entrepreneurial potential and grow Scotland’s competitive business base”.

It is, of course, easy to be cynical about new Advisory Groups and what they may be able to achieve: the existence of such groups is nothing new. In particular, the Scottish Government’s response to recommendations from such groups has been a little high level – and often felt like more of the same rather than innovative policy making or a true shift in priorities.

It is clear that investment in businesses and good quality jobs is required to ensure that Scotland can thrive post-pandemic. Policymakers need to be clear what outcomes they are trying to influence and clearly set out how they will monitor and evaluate such policies.

In a constrained fiscal environment as we move into 2022-23, it is more important than ever that we know what works – and that we spend our money there.


Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.