James Black: No need to panic just yet, but worrying signs are looming for business

This year has not seen the return to normality hoped for by many companies.

Supply chain disruption, rising prices, hiring difficulties, interest rate hikes and lack of confidence are taking their toll. Many economic organizations are now forecasting potential downturns in the UK and around the world, but significant uncertainty remains over the expected trading conditions.

One of the challenges of predicting downturns is timing. It often takes months to collect solid data, so we often don’t know if the economy has started to slow until months after it has started.

It is useful to take a step back and examine the important economic drivers in these uncertain times. Survey snapshots, such as our recent Scottish Business Monitor sponsored by Addleshaw Goddard, may provide some clues. So what are companies saying about their current performance and their expectations for the coming year?

Starting with the positives, more companies reported an increase in sales volume in the second quarter of the year than a decrease, resulting in a net balance of +15%. This net figure is reasonably high, and this level has not been seen in our survey since 2014. Employment, new business and capital investment indicators also remained positive in the second quarter.

At first glance, companies have been remarkably resilient. Few expected to emerge from one of the biggest human health crises in more than a century with unemployment rates near record highs. Scottish onshore GDP rose 0.6% in May, maintaining 1.1% above February 2020 production levels.

But concerns are now beginning to emerge in the data. The net sales volume balance is still positive but has weakened since the beginning of the year. Regarding expectations over the next six months, the positive but weakened result is consistent for many indicators such as business volume, new business and employment.

This weakening is reflected in several other surveys. The RBS Purchasing Managers’ Index for June showed the weakest expansion of business activity in Scotland since January. Just 13% of UK businesses in the ONS Business Outlook and Conditions Survey reported an increase in turnover in June, compared to 24% reporting a decline, and expectations for August are negative. The most commonly reported challenge impacting these revenue figures is the cost of materials. Since 1998, our survey has asked Scottish businesses to report on their operating costs and provides a useful benchmark for the scale of this challenge.

The last four quarters have shown cost increases across the board. The costs of energy, employees, inputs, imported goods and services, distribution and credit are all increasing or are already very high. Compared to the 23 years of total business costs studied between 1998 and 2020, each of the last four quarters is a record.

The ripple effect of these price increases continues to ripple through the economy. An ONS survey says 44% of UK businesses said they absorbed the costs, while 26% passed on price increases to consumers. Two in five Scottish businesses we surveyed said they planned to scale back operations due to energy prices.

There are concerns about how these supply-side issues could lead to significant impacts on demand and contribute to a downturn. So what does the evidence show about how the main drivers of demand – consumer spending, export demand, government spending and investment – ​​have been affected?

Household spending accounts for nearly two-thirds of Scotland’s GDP, but many people have seen their costs rise while their wages have not kept pace. The likely impact is that people dip into savings, borrow, buy fewer goods and services, or substitute for cheaper goods and services.

On the savings side, aggregate data through May on household net deposits with UK banks has so far remained relatively flat on the year. If consumers, as a whole, began to dip into their savings, this would be worrisome not only for living standards, but also for possible future reckoning, as those savings would eventually run out. Credit card borrowing appears to have increased, but total borrowing is still subdued compared to the past decade.

However, UK retail sales data through June shows an increase in sales values ​​and a decline in sales volumes. Inflation has widened what is now a significant gap between these trends. Sales volumes have fallen to levels close to the levels seen in June 2019. Perhaps not worrying yet, but the trend is concerning both in terms of living standards and the impact on businesses and their chains. supply.

For now, the data mostly points to reductions in deferred purchases such as furniture. Most anecdotal evidence suggests consumers are opting for cheaper options in supermarkets and turning to budget retailers.

If domestic demand seems to be showing the first signs of slowing down, will exports come to the rescue? Most Scottish businesses in our survey say no. Pessimism exists about export performance over the next six months, and a global slowdown in 2023 looks increasingly likely.

Public spending in Scotland is expected to grow only marginally in real terms between 2022/23 and 2025/26, and inflation expectations have since deteriorated. The cost of living payment and the £400 energy rebate will likely partially offset but not reverse the expected negative consumer trends. However, it remains to be seen how British policy might change under new leadership.

According to the Bank of England, investment intentions are still positive and companies are increasingly turning to energy-efficient investments. But some companies are reassessing their investment plans as the economic outlook deteriorates.

This year’s challenges stem from a perfect storm of supply chain issues. This included several downside surprises. An optimist can also expect positive surprises. Any signs of improving energy supply and production levels in China warrant our attention over the coming months.

For now, the message for companies is not to panic but to worry. But for many people, it is increasingly clear that we are leaving a health crisis to enter a crisis in living standards.

James Black is a Knowledge Exchange Associate at the Fraser of Allander Institute at the University of Strathclyde.

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