Scottish small business outlook hits two-year high

The FSB’s Small Business Index (SBI) for Q1 2024 indicates a return of confidence into positive territory with a score of +10.7, surpassing the UK average of +5.5.

The growing optimism reflects improvements in consumer spending and the economy more broadly. However, there were clear signs of the strong headwinds continuing to face small businesses as more firms reported falling revenues and staff numbers than experienced growth.

Andrew McRae, FSB’s Scotland policy chair, said: “It is very welcome that we are starting to see the first green shoots of economic recovery, with nearly two in five small businesses in Scotland planning to expand in the coming year.

“But after two hard years of the post-Covid cost of doing business crisis, we can’t take sustained recovery for granted. Our members’ experience shows it remains a tough business environment with sharply increased costs across the board.”

Mr McRae continued: “It’s therefore vital the new First Minister puts growth and the needs of small businesses at the heart of his agenda.

“That means delivering on the most significant planks of the New Deal for Business, and in particular ensuring there is a fuller assessment of the impact on small businesses whenever any new regulations are brought forward.

“There’s also a pressing need to accelerate work to understand the cumulative impact of regulations on small businesses.”

The SBI found slightly more than a third of small businesses (34.8%) in Scotland expected their performance to improve in the next three months, compared to slightly less than a quarter (24.1%) who expect it will get worse. The findings represent the most positive outlook since Q1 2022 and follow three consecutive quarters of negative sentiment.

Although Scotland’s GDP contracted by 0.6% in Q4 2023 on a quarterly basis, growth prospects appear more positive moving forward. While economic headwinds remain, it is hoped that small businesses in Scotland can expect demand from households to improve further this year once the Bank of England begins cutting interest rates.

More than four-fifths of firms in Scotland (83.2%) experienced rising costs, largely due to increased utility bills, rents and wage bills. The proportion reporting revenue decline (33.9%) still exceeded the number reporting an increase (31.3%) in Q1, while slightly more firms experienced a contraction in employee numbers (11.5%) than an increase (10.6%).

Looking ahead, a net balance of 9.1% of Scotland’s small businesses expect headcount numbers to rise in the next three months, while an increased proportion (39.1%) have aspirations to grow their business in the next 12 months. That, however, lags behind the 52.4% rate across the UK as a whole.