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Scottish businesses prepare for fastest spell of growth in four years

Latest Royal Bank of Scotland Scottish Business Monitor shows strong expectations amongst firms for first half of 2018.

Findings in the latest Royal Bank of Scotland Business Monitor, conducted by the Fraser of Allander Institute, show that Scottish business is bracing itself for its fastest period of growth in nearly four years.

Overall, weakening sterling and the current global growth acceleration is expected to fuel the country’s economy during the first half of 2018, creating strong pickup in overseas businesses for Scotland’s exporters. But inflationary pressures are leading to rising costs for the majority of companies, with more than half of companies expecting costs to rise further during the next six months.

The survey of nearly 400 Scottish businesses also reveals that more than one in four (28%) enjoyed an increase in export activity in the three months to December compared to one in five (20%) reporting a decline. The services sector led the way during Q4 with a net 17% reporting an increase in export activity.

Businesses are optimistic that the trend will continue, with a net 24% expecting export activity to rise over the next six months.

The Monitor shows that more than a third (37%) of firms reported an increase in the total volume of business during the last quarter, compared to 27% who witnessed a fall in activity. Growth was strongest in the Highlands & Islands (19%) and weakest in the North East (1%). This shift in the North East is still an improvement in a reported fall of -4% during Q3 2017.

Collectively, a net 13% of all firms surveyed said they expected total business volumes to rise in the six months. If these expectations are realised the first half of the year will see the strongest growth since late 2014 when the falling oil price began to bite. Optimism was strongest in the finance and business services sector (24%) and manufacturing (20%).

New business continued on the upward trend enjoyed since 2016. A third (33%) stated that the volume of new business rose in the three months to December compared to one in five (20%) who stated it fell. New business volumes grew across all regions of Scotland, most strongly in East Central Scotland (29%) and in the Highlands and Islands (15%).

Inflationary pressures are continuing to impact upon costs for Scottish business, with 59% of all businesses stating that costs rose over the last quarter. More than half (56%) of all firms expect costs to increase in the next six months, suggesting businesses are concerned that inflationary pressures will continue to build.

Commenting on the Business Monitor results, Royal Bank of Scotland Chief Economist Stephen Boyle said: “Christmas appears to have come early for Scotland’s economy. The three months to mid-December delivered the fastest growth of the year. However, that pace of growth remains modest by the standards of the past.

“If businesses’ expectations are realised growth in the first six months of 2018 will sprout to its fastest pace in four years. At least in part, that gift comes courtesy of an improvement in export performance as firms benefit from sterling’s fall and Europe’s growth.

“This latest report does suggest that the North East’s oil-related downturn has passed. The only weak spot in this improved outlook for the economy is capital investment with firms reporting that it fell again in the last three months.

Professor Graeme Roy, Director of the Fraser of Allander Institute, added: "After a challenging 2017, the final Scottish Business Monitor for the year suggests that firms in Scotland are continuing to remain resilient with both turnover and the volume of activity remaining positive.

“Exporting firms continue to take advantage of the competitive pound but levels of business investment remain disappointing. With the Scottish Fiscal Commission forecasting a weak outlook for productivity in the years ahead, turning around levels of investment in our economy will be vital for long-term economic prosperity.”

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