UK SMEs enjoy solid start to 2024 but Scottish picture looking less rosy

The UK-wide report does not provide a geographic breakdown but its generally upbeat findings come just days after Addleshaw Goddard’s Scottish business monitor suggested that business fortunes north of the Border had taken a distinct turn for the worse in the first quarter of the year. It also follows a warning last month from the Scottish Chambers of Commerce that the “persistently high cost of doing business” was hammering cashflow and profitability for Scotland’s small and medium-sized enterprises (SMEs) - the backbone of the nation’s private sector economy.

NatWest’s tracker is seen as a key indicator of the health of the UK SME economy. Business activity expanded at a “solid rate” throughout the first quarter of the year with the headline activity index recording 52.6 in March. A reading above 50 indicates growth or expansion, while a result under 50 denotes contraction.

The recovery in overall output levels was driven by improving order books, with new work increasing for the fourth month running in March. Leading the way, the services sector recorded the fastest upturn in business activity, recording 53.2, followed by the manufacturing sector, which registered 51.4. SME construction output meanwhile near-stabilised in March at 49.6, which also represented an improved trend after stronger declines in activity in the second half of last year.

In the latest survey, SMEs reported another sharp rise in their average cost burdens, especially those in the service economy, largely due to rising salary payments and transportation costs. However, the overall rate of input price inflation was the slowest since November 2023.

Sebastian Burnside, NatWest chief economist, said: “Businesses have shown great resilience in the face of challenging market conditions as rocketing inflation and then rising interest rates made their mark. So, it’s good to see that firms are now reporting much more muted inflationary pressures at the same time as five months of growth in a row.

“When it comes to job creation, the picture is more varied. Higher levels of SME employment largely reflects greater recruitment in the service economy, while hiring trends were much more subdued in manufacturing and construction.”

The latest Addleshaw Goddard Scottish business monitor, which is produced in partnership with the University of Strathclyde’s Fraser of Allander Institute, painted a rather grim picture for the opening three months of 2024. Cost pressures continued to bite despite inflation easing, with 83 per cent of firms in Scotland seeing their costs increase over the quarter. Across almost every measure, firms reported deteriorating business conditions.

Despite that, firms are increasingly upbeat as they look ahead, with the expected volume of business over the next six months remaining positive, along with positive expectations of new business activity, turnover and employment.

Alan Shanks, head of Scotland at Addleshaw Goddard, said: “Among some rather sombre figures, what is clear is that Scottish businesses remain resilient and optimistic, and are doing their utmost to drive the economic recovery that we hope to see over the course of 2024.”

Scottish firms warn ‘persistently high cost of doing business’ including new taxes risks long-term harm to economy