Business confidence is on the rise

Three pointers this week show confidence improving across most UK businesses, despite continuing problems in manufacturing and in exports to the troubled Euro zone.

The latest Purchasing Managers Index (PMI) data from the Bank of Scotland show faster increases in both business activity and new work in Scotland. Companies are creating more jobs, with employment rising at the fastest pace in nine months.

The headline Bank of Scotland PMI climbed to a 12-month high of 53.1 in April, from March’s reading of 51.1, signalling a solid increase in private sector business activity north of the border. The expansion was broad-based by sector, with a return to growth in factory output accompanying a further rise in activity at services firms. Moreover, Scotland outperformed the UK as whole. 

Separately, the latest Business Trends report from accountants and business advisers BDO shows business confidence is improving, driven by steadily climbing optimism levels in the services sector.

And now the Confederation of British Industry says the economy is moving from "flat to growth", although it kept its forecast for growth this year at 1%.

The CBI's director-general, John Cridland, said: "Amongst CBI companies, there's a general sense that the forward mood has brightened a little."  He said the government's Funding for Lending Scheme was beginning to have an impact: "When I talk to small businesses, they are already seeing the benefit on cost [of credit], and lower cost leads to more availability."

However, it adds that “clear challenges” remain, with uncertainty in the Euro zone and what it called a muted international outlook holding back investment. And at home, inflation is eroding living standards. It expects inflation to peak at 3.1 per cent during this quarter.

The surveys bear out the analysis that Scot-Buzz has consistently presented in recent months, arguing that economic activity has been enjoying a bigger pick-up than that portrayed in official Office for National Statistics data. And far from Scotland lagging, it is on many measures ahead of the pack.

Overall business confidence according to BDO is still below the 95.0 mark that indicates growth. But service sector confidence moved up substantially in April. The services Output Index moved up from 93.2 in March to 94.9. The sector makes up roughly three quarters of the economy, so this reading – almost at the crucial 95.0 mark – suggests Q2 2013 has got off to a good start.

The services Optimism Index, which predicts business performance two quarters ahead, also went up, increasing to 94.1 from 93.2 last month.

However, the Output Index for manufacturing fell from 92.4 to 90.8. The Optimism Index for manufacturing meanwhile moved up only 0.1 to a lowly 88.3, a considerable way from 95.0.

In spite of this, increasing confidence in the service sector has fuelled the improvement of overall businesses confidence. BDO’s Output and Optimism indices moved up to 94.1 and 93.0 respectively. The former is the highest reading for 10 months, while the latter has moved up 0.8 points from March, the highest it has been since October 2012.

The Bank of Scotland PMI reveals a fifth straight monthly increase in the volume of new work placed with businesses. The latest rise was faster than that observed one month earlier, although slower than the increase seen UK-wide. There was meanwhile no change in the level of new export orders placed with manufacturers, as was the case in March.

The pace of job creation quickened for the third time in the past four months, reaching the fastest since last July. Staffing levels rose at both manufacturers and service providers over the month, with similar rates of increase in each sector.  

Outstanding business in Scotland’s private sector economy was reduced only marginally during the latest survey period and at the slowest rate in the ongoing three-month sequence of decreasing backlogs.  

April saw a dip in the rate of cost inflation facing businesses in Scotland from March’s recent peak. Nevertheless, the month-on-month increase in cost burdens was still strong, with only Northern Ireland seeing a steeper rise among the 12 UK regions monitored by PMI data. Firms in Scotland highlighted paying more for energy, food and, as a consequence unfavourable currency movements, a number of imported items.

Output prices meanwhile increased for the fourth month in a row. Although only modest, the latest rise was nevertheless the most marked since last September.

Donald MacRae, Chief Economist at Bank of Scotland, said: "April’s PMI climbed to a twelve month high signalling growth in the private sector of the Scottish economy at the start of the second quarter of the year.  Both business activity and employment grew in the manufacturing and services sectors while the volume of new business rose for the fifth month in a row.

“However, demand growth was largely UK based with the level of new export orders showing a flat trend for the last five months. These results suggest the Scottish economy is now beginning a more robust recovery.”