Economic growth is expected to continue throughout the year, but a sharp drop in business confidence suggests the current momentum is under threat, according to a new report.
Findings from the August business trends report by accountants and business advisers BDO LLP suggest firms are expecting “continued robust growth” in the latter part of 2015, driven by strong consumer spending, rising wages and near-zero inflation.
It came as a separate report from the Bank of Scotland signalled continued improvements in Scotland’s private sector with output and new orders expanding in August across both the manufacturing and service sectors, although at a slower rate than in July.
But “cracks” are emerging in the longer-term outlook, with the BDO report recording a fifth consecutive monthly drop in business confidence.
BDO said its optimism index fell to 101.9 in August, down from 103.3 in July, demonstrating that companies are concerned about their prospects beyond 2015.
Manufacturers were said to be particularly concerned, recording their lowest level of confidence for nearly three years.
Their confidence score of 86.2, the lowest level since November 2012, was “dramatically below” the 95 mark which indicates growth, according to BDO.
It said exporters, who are already pressured by the continued strength of the pound, are increasingly nervous that economic turmoil in China will start to affect growth around the world, hitting their core markets.
Martin Gill, partner and head of BDO in Scotland, said: “While the expected continued economic growth is encouraging, falling business confidence suggests we’re approaching a turning point in the economy. Policy makers cannot ignore this, otherwise they run the risk of an economic slowdown.”
He went on: “We cannot rely on consumer spending and services in the long-term. Policy makers must focus on steps to rebalance the economy and give support to manufacturers and greater wealth creation in Scotland and elsewhere outside London and the South East.”
Meanwhile, the Bank of Scotland’s PMI figures signalled some improvements in the private sector last month.
Staffing levels rose in August following a reduction the previous month. In addition, cost burdens rose at the slowest rate in more than 16 years, while competitiveness led businesses to offer price discounts.
The headline PMI figure, which is a single measure of the month-on-month change in manufacturing and services output, fell to 50.8 in August, down from 52.2 in July.
Despite still signalling growth for the fifth successive month, the index has eased to the lowest level since April.
Donald MacRae, chief economist at the bank, said: “August’s PMI was 50.8 recording a fall in the month but still signalling growth. Output and employment grew in all sectors but at modest rates. New business grew slowly in both manufacturing and services while new export orders fell for the seventh successive month.
“The private sector continues to recover from the slowdown at the start of the year but the Scottish economy will have to rely on the Government sector to raise growth to trend levels in the third quarter of this year.”