The proportion believing rates should not be raised further was more than twice that thinking the Bank should continue to increase borrowing costs. Firms were asked about this matter before the latest quarter-point rise in benchmark interest rates to 5.25% was announced on August 3, with the survey closed off on that day. The Bank of England began raising base rates from a record low of 0.1% in December 2021.
The survey, produced by law firm Addleshaw Goddard in partnership with the University of Strathclyde’s Fraser of Allander Institute, sampled 400 firms from across the Scottish economy in July and August. It examined business sentiment in the second quarter and the outlook for the year ahead.
Addleshaw Goddard declared that “one of the starkest findings” of its latest Scottish Business Monitor was that around 40% of firms surveyed had cancelled or delayed investments – primarily in physical assets – over the past year.
It added: “The most common reasons for these cancellations and delays have been economic uncertainty, affordability, and the cost of borrowing. Half of the firms that have cancelled [or] delayed investments are either unsure when they plan on making these investments or are planning them for 2025 onwards.”
Asked whether they thought the Bank of England “should continue to increase interest rates this year to bring down inflation”, 46.7% of survey respondents said “no”. Meanwhile, 20.5% said “yes”, 18% declared they were “unsure” and 14.8% responded “not applicable”.
Addleshaw Goddard declared “the performance of capital investment is a major concern”.
Mairi Spowage, director of the Fraser of Allander Institute, said: “Despite the economy performing better than we expected last year, growth over the next few years is forecast to be fairly muted, which is reflected in our latest business survey.
“Although inflationary pressures, particularly energy costs, continue to ease, a significant share of firms are putting off investments while they cope with a challenging economic landscape. This is particularly concerning when we look forward to the recovery and longer-term prosperity of the Scottish economy.”
The survey shows that 83% of firms in Scotland have seen their costs increase, with 71% experiencing increased expenses of up to 50%. Firms throughout the UK have been enduring a cost of doing business crisis.
Most firms in Scotland surveyed by Addleshaw Goddard and Fraser of Allander have avoided passing these increased costs on to customers, the survey signals.
The monitor states: “Two in three firms that have experienced increasing costs over the past year have absorbed them to avoid passing them on to their consumers. The construction, wholesale and retail, and manufacturing sectors have absorbed the greatest proportion of rising costs. Half of surveyed businesses are either unable to absorb costs for any longer or are unsure how much longer they can absorb costs, while over a third expect to only be able to absorb costs for another year.”
The survey signals a fall in business activity in Scotland in the second quarter but there was better news on the jobs front.
It says: “Over quarter two, businesses typically experienced a contraction in business sales, turnover, investment, and export activity, with just employment increasing on quarter one.”
The proportion of firms expecting weak or very weak growth in the Scottish economy increased from 62% to 71% in the second quarter, the survey shows.
Around 33% of firms surveyed expect to reduce their operations this year because of higher energy prices.
The survey says: “Energy cost pressures are still being felt more strongly in certain sectors, as 43% of firms in the wholesale and retail sector and 39% of manufacturing firms expect to reduce their operations this year due to higher energy prices.”
Annual UK consumer prices index inflation fell from 7.9% in June to 6.8% in July, nearly three-and-a-half times the 2% target set for the Bank of England by the Treasury, figures published yesterday by the Office for National Statistics showed.
