Weak pound buoys Scottish firms but inflation risk rising

● Exports see strongest growth in three years with more gains ahead expected

The Scottish economy is enjoying a boost from the impact of the weak pound on tourism and exports but inflationary pressures are leading to rising costs for most companies, a closely-watched report said today.

The latest Royal Bank of Scotland (RBS) Business Monitor, conducted by the Fraser of Allander Institute, saw businesses report improved growth in the third quarter of 2017.

More than a third (36 per cent) of firms reported an increase in the total volume of business during the last quarter, compared to 27 per cent who witnessed a fall.

The balance of 9 per cent represents an increase of three points since the second quarter of 2017 and six points since the first quarter of the year.

Construction and financial and business services were among the strongest sectors with tourism also enjoying above average growth thanks to increased visitor numbers in the wake of the pound’s fall.

Sterling’s weakness also led to the strongest export growth rates in three years. The survey of more than 400 Scottish businesses reveals that 33 per cent enjoyed an increase in export activity in the three months to September compared to 21 per cent reporting a decline.

Businesses are also optimistic that the trend will continue, with a net 6 per cent expecting export activity to rise over the next six months.

But inflationary pressures are leading to rising costs for the majority of companies, with capital investment continuing the downward trend which begun at the beginning of 2017.

More than half of businesses said that costs rose over the last quarter, with only one in 16 reporting a fall.

Cost pressures were most acute in tourism where a net 66 per cent reported a rise in costs, followed by distribution (65 per cent) and construction (65 per cent).

Just over half (51 per cent) of all firms expect costs to increase in the next six months, suggesting businesses are concerned that inflationary pressures will continue to build.

Stephen Boyle, chief economist with RBS, said: “These results provide welcome confirmation of continued, albeit modest growth and the prospect that the economy will continue to expand into 2018.

“The apparent return of sustained export growth is especially notable, likely underpinned by both sterling’s depreciation and the recovery in demand in the euro area economies.”

However, he said the persistence of inflationary pressures suggests that households will feel a squeeze on their spending power for some time to come yet.”

Meanwhile, independent Scottish economic forecaster Mackay Consultants yesterday reiterated its estimates for gross domestic product (GDP) growth in Scotland of 1.2 per cent this year, 1.5 per cent in 2018 and 1.7 per cent in 2019, all well below the long-term average of about 2 per cent.