Scottish Chambers Business Survey

MEDIA RELEASE

Embargoed until 0001 hours on Thursday11th October 2012

NO SIGNS OF ANYECONOMIC RECOVERYAS THE SUMMER’S OUTURN IS WORSE THAN EXPECTED

Scottish Chambers of Commerce have today (Thursday) released their Business Survey results for the third quarter of 2012. The survey, conducted in conjunction with the University of Strathclyde’s Fraser of Allander Institute, reports a further and more widespread weakening in activity in the Scottish economy in the third quarter of 2012, and more cautious outlook for the fourth quarter with fewer signs of any upturn in business sentiment and activity.

Garry Clark, Head of Policy and Public Affairs at Scottish Chambers of Commerce, said:

“Our latest survey suggests that many Scottish businesses experienced deteriorating business conditions in the third quarter and have revised downwards their expectations for the fourth quarter and first half of 2013. Once again, with few exceptions, demand remains weak and inadequate and the sense of an economy stagnating appears more widespread.

“The manufacturing sector reported, as expected, leaner times, with weaker trends in both domestic and export orders. Expectations as to the trends in orders for the year ahead are at their weakest for two years, with few respondents anticipating improving export activity as the slowdown in the international economy continues.

“The survey also reveals a marked summer downturn in the Scottish tourism sector. The combination of poor weather, impact of the Olympics on tourism numbers together with weak business demand and consumer uncertainty contributed to many respondents reporting a weakening in visitor demand, reduced visitor expenditure and an increased need to reduce room rates.

“Activity in construction remains depressed. We have consistently argued that increased capital spending is necessary to bring about the infrastructure improvements that Scotland needs in transport, energy generation and transmission. Governments need to take steps to bring forward and approve a programme of capital infrastructure improvements that will bring long term benefits to the Scottish and UK economies. Whilst the Scottish Government has had a strong track record in prioritising infrastructure investment, it urgently needs to reconsider its plans to axe £350 million of investment from its project to extend the electrification of the central Scotland rail network. Scotland simply cannot afford to throw such investment opportunities away. Also the Scottish Government’s forthcoming Procurement Reform Bill needs to ensure that, in future, Scottish businesses reap more of the rewards from Scottish public sector contracts.

“At a UK level, it is now imperative that the Chancellor takes the opportunity to deliver a boost to capital investment in his Autumn Statement.”

BUSINESS PERFORMANCE

Summary Points

OverallThe continuing weakness in the Scottish economy was more widespread in Q3 than in the first half of 2012 as the trends in demand in manufacturing and in tourism weakened. The outturn in all sectors in Q3 was weaker than expected and weak in all main sectors. Business sentiment weakened with only 10% of manufacturing, 14% of construction, 11% of retail and 12% of tourism respondents reporting being more confident than in the second quarter. In contrast 32% of manufacturing, 41% of construction, 53% of retail and 39% of tourism respondents reported being less confident as to the general business situation. In all sectors the main trends in activity remain weak, reinforcing the sense of weak, stagnatingdemand and continuing negative growth.

A weakening in demand in Q3 had been expected in both manufacturing and tourism, but the outturn was worse than expected. Continuing weak demand had been anticipated in construction and retail but again the outturn was weaker than forecast and little, if any significant improvement is expected in any sector in the fourth quarter. Looking ahead to 2013 respondents in all sectors except retail, are more cautious and concerned as to future demand, turnover and profitability than they were earlier in 2012. As we noted in Q2 the continuing consumer uncertainty and on-going public sector cuts and reorganisations will be important features in 2012/3 and will continue to contribute to a sense of caution and uncertainty in the business community.

Within manufacturing trends in orders declined sharply and respondents expect these downward trends to continue through to the end of the year, and the anticipated trends in work in progress remain subdued. Respondents at the end of Q3 are now slightly less confident as to the year ahead than earlier in the year.

Business confidence Business confidence remained weak, declining across all main sectors. Confidence weakened further of manufacturing, construction, wholesale and tourism firms and for retailers ‘rose’ from a net balance of -46% to -42%. Confidence, compared to the third quarter of 2011, declined further for a net balance of manufacturing and tourism respondents.

Once again weak business confidence amongst the non-national multiple retail sector was widespread, reflecting the continuingweak consumer confidence and spending, as illustrated by the continuing numbers of retail closures. In tourismthe combination of consumer uncertainty & reduced spending, bad weather focus on the London events contributed to widespread reporting of weak demand and more extensive cutting of room rates.

Demand/salesFirms in the previous survey had anticipated a weakening in manufacturing orders and the outturn was worse than had been forecast. The rising trend in total orders, a feature of the first half of 2012, ended in Q3 and a further decline is anticipated for Q4. Orders from all sources declined with export orders declining for a net balance of firms for the first time since Q4 2011. Demand in construction remained weak, the outturn was weaker than anticipated and the trend remained weaker than a year ago.The signs of improvement noted in the first quarter appear to be less evident. Pressures on margins for construction firms remain intense.

Declining trends in retail sales were again widely reported in the third quarter and discounting was again widespread. 62% reported a decline in sales (compared to54% in the previous quarter), and 53% (45% in the previous quarter) expect a further decline. In tourism the outturn in demand for Q3 2012 was significantly weaker than had been forecast and the net trends visitor numbers and demand were weaker than for the third quarters of recent years.

Capacity/work in progressAverage capacity used in manufacturing rose marginally from 72.7% in Q2to 75% in the latest quarter. However this level was below that of quarter threes of previous years. A net balance of 54%reported working below optimum levels and a net of firms expect an easing in the level of work in progress in Q4 2012. In constructioncapacity used fell marginally from 75.7% to 74.6%, the same level reported in Quarter 3 2011.

In construction the proportion reporting working below optimum levels increased to 78.6% (a rise from the 70% reported in Q2). In tourism occupancy, at 68% was lower than the third quarters of 2011 and 2010.

Cost pressuresOnce again for manufacturing firms raw material/suppliers prices (60% down from 63% in Q2) and transport costs (41% compared to 47% in Q2) were the most widely reported cost pressures, and generally cost pressures were slightly less widely reported in Q3 across all sectors.More than a quarter (17%in Q2) of manufacturing, 63% (50%in Q2) of wholesale and 52% (57% in Q1) of retail respondents reported expecting to increase prices over the next three months.The trends in cash flow weakened further and the prospects for profitability over the next twelve monthsfurther deteriorated. Pressures on margins were widely reported in construction and almost a third of tourism respondents reported reductions to room rates.

Pay and employmentFor a further quarter labour market activity remained subdued with the majority of respondentsin all sectors (ranging from 56% in tourism to over 80% in wholesale) reporting no change to employment levels. Nevertheless, the trends were generally as had been anticipated by firms three months ago;modestly falling trends in employment were reported in all main sectors. Recruitment difficulties remainedsubdued in all sectors.

Pay increases in the third quarter ranged from 2.0% in construction to 4.0% in tourism. Over the past year pay increases have averaged 2.2% in construction, 2.95% in manufacturing, 2.7% in retail and 3.7% tourism – again implying continuing real declines in household income and spending.

Outlook The percentage of respondents in all sectors expecting an improvement in demand in Q4 is limited; the majority anticipate either no change or a weakening in demand, suggesting few, if any signs of an improvement in the Scottish economy over the short term. In our report for the second quarter we noted the sense of a slowdown in economic activity across our major markets together with the adverse effects of on-going reorganisation and cutbacks in the UKpublic services influencing both consumer and business sentiment and activity inScotland and in the rest of the United Kingdom. At the end of the third quarter we see more signs of a slowdown and a wider sense of an economy stagnating with weak and inadequate performance. Changes to UK government policies will be critical in driving any sustained economy, but there are few signs of any change in national policy and the current age of austerity seems likely to continue.

Strathclyde University’s Fraser of Allander Institute in collaboration with the Scottish Chambers’ of Commerce conducts the quarterly Chambers’ Business Survey. In the present survey, which was conducted in September and earlyOctober 2012, some 200 firms responded to the questionnaire.

© University of Strathclyde, Fraser of Allander Institute 2012. Use, storage and distribution by any means is freely given provided full citation is given.

For further information contact:

On the survey results Cliff Lockyer0141 548 3198 ()

Eleanor Malloy0141 548 3967

On Chamber policyGarry Clark0141 204 8337 or 07795 158137 ()

Scottish Chambers’ Business SurveyStrictly embargoed to 11th October 2012

MANUFACTURING

Optimism

Business confidence weakened significantly in quarter threewith a net balance of 22% of firms reporting reduced confidence levels. Business optimism remains weaker than a year ago, reflecting concerns as to the continuing Euro zone weaknesses.

Orders and Sales

During the three months to the end of September, the trend in total new orders declined by more than had been expected. Respondents are also more cautious as to the trends in orders in the fourth quarter. Average capacity utilisation improved although was down on the same quarter of 2011.The underlying weaknesses in demand remain evident with more than half of firms reporting working below optimum levels.

Turnover is expected to decline for a small net balance of firms (respondents in the previous quarter forecast a rise). The net trends in profitability are also weaker than in the first quarter with a net balance expecting a fall in profits.

Investment

Although remaining weak, the trends in investment in plant/machineryimproved slightly during quarter three for a net balance of manufacturing firms with around 60% expecting no overall change. New investment was again mainly directed towards replacement or to improve efficiency.

Employment

A net balance of firms reported a decline in total employment levels although around two thirds continued to report no change to overall levels. Slightly fewer than 12% of firms increased pay during the three months to Septemberand the average increase was 3.5%. 43% reported seeking to recruit staff, and difficulties remained limited.

Q3 2012 / Net Balances
Up / Level / Down / Q3/12 / Q2/12 / Q1/12

Business Optimism

/ 10.3 / 57.7 / 32.1 / -21.8 / -3.2 / 14.3
Trends in actual orders
Total new orders / 20.5 / 41 / 38.5 / -18 / 14.1 / 14.3
Scottish orders / 14.3 / 47.1 / 38.6 / -24.3 / -7 / 5.1
Rest of UK orders / 15.9 / 49.3 / 34.8 / -18.9 / 0 / -7.3
Export orders [40.6% = N/A] / 13.2 / 26.3 / 30.3 / -17.1 / 7.8 / 9.7
Trends in expected orders
Total new orders / 15.8 / 55.3 / 28.9 / -13.1 / -3.2 / 23.3
Scottish orders / 7.2 / 62.3 / 30.4 / -23.2 / -16.4 / 10.7
Rest of UK orders / 11.4 / 60.0 / 28.6 / -17.2 / -11.5 / 7.4
Export orders (41.3%= N/A] / 13.0 / 33.8 / 22.1 / -9.1 / 0 / 17.7

Av Capacity used

/ 75.0 / 75.0 / 72.7 / 76.2
Invest in plant/equip. / 20.0 / 58.7 / 21.3 / -1.3 / -13.4 / 6.7

Cash flow past 3 moths

/ 11.8 / 55.3 / 32.9 / -21.1 / -17.2 / -12.7
Turnover next 12 moths / 25.0 / 48.7 / 26.3 / -1.3 / 15.7 / 30.1
Profitability next 12 moths / 18.4 / 51.3 / 30.3 / -11.9 / 1.6 / 4.7
Price change next 3 moths / 26.0 / 64.9 / 9.1 / 16.9 / 17.2 / 36.5
Pressures to raise prices from
Pay settlements / 23.0 / 23 / 18.8 / 17.5
Raw material costs / 60.3 / 60.3 / 62.5 / 84.1
Finance costs / 12.0 / 12 / 18.8 / 6.3
Other overheads / 34.7 / 34.7 / 39.1 / 39.7
Transport costs / 41.3 / 41.3 / 46.9 / 44.4
Employment trends
Total actual employment / 15.8 / 65.8 / 18.4 / -2.6 / 3.2 / 3.2
Total expected next 3 months / 8 / 74.7 / 17.3 / -9.3 / -6.6 / 1.6

Average pay increase

/ 3.5 / 3.5 / 3.3 / 3.1

CONSTRUCTION

Optimism

Business confidence weakened further in the third quarter;although the rate of decline worsened compared to Q2 it was less severe when compared to Q3 2012.

Contracts

Orders continued to slow at much the same rate as in the previous quarter and further declines are forecast for Q4. With very few new contracts evident construction firms continue to rely on repair and maintenance work.The decline in public sector orders steepened slightly. More than three-quarters, compared to 70% in the previous survey, reported working below capacity.

Cash flow trends continued to decline. Turnover and profitability are still expected to be weak over the next 12 months together with continued pressure on margins. Average capacity useddeclined marginally from 75.7% to 74.6% although was broadly in line with the Q3 2011 level.

Employment

The downward trend in employment continued in Q3 with few firms reporting a rise. Once again few recruitment difficulties were evident. Average pay increases fell from 2.3% in Q2 to 2.0%.

Q3 2012 / Net Balances
Up / Level / Down / Q2/12 / Q1/12

Business Optimism

/ 13.8 / 44.8 / 41.1 / -27.3 / -15.8 / -20
Trends in actual contracts
Total new contracts / 16.7 / 33.3 / 50 / -33.3 / -34.2 / -8
Public sector orders / 16.7 / 20.8 / 62.5 / -45.8 / -43.3 / -20
Private commercial / 16.0 / 40.0 / 44.0 / -28.0 / -30.0 / -4.5
Domestic/house build / 8.3 / 45.8 / 45.8 / -37.5 / -28.2 / -52.9
Trends in expected contracts
Total new orders / 7.4 / 48.1 / 44.4 / -37.0 / -19.7 / -25
Public sector orders / 13.6 / 54 / 31.8 / -18.2 / -27.6 / -14.3
Private commercial / 13 / 47.8 / 39.1 / -26.1 / -17.2 / -23.8
Domestic/house build / 4.3 / 56.5 / 39.1 / -34.8 / -20.0 / -31.3
Trends in work in progress
Actual / 20.0 / 40.0 / 40.0 / -20.0 / -15.8 / -16
Expected / 14.3 / 46.4 / 39.3 / -25.0 / -35.2 / -24

Capacity used

/ 74.6 / 74.6 / 75.7 / 75.2
Invest in plant/equip. / 6.7 / 60.0 / 33.3 / -26.6 / -44
Leasing in plant/equipment. / 6.7 / 46.7 / 46.7 / -40.0 / -37.5
Employment trends
Total actual employment / 3.3 / 70.0 / 26.7 / -23.4 / -26.3 / -20.8
Total expected next 3 months / 3.7 / 74.1 / 22.2 / -18.5 / -26.5 / -36.4

Average pay increase

/ 2.0 / 2.0 / 2.3 / 2.5
Percent recruiting staff / 31.0 / 31.0 / 21.1 / 25
Recruitment difficulties increasing / 9.1 / 9.1 / 0 / 0

WHOLESALE DISTRIBUTION

Optimism

Business optimism amongst Scottish wholesale firms continued to decline with slightly fewer than half of firms reporting a decline in business confidence. Business confidence however, was less depressed compared to one year ago.

Sales

The downward trend in sales was broadly in line with expectations from the previous survey; a net balance expect the decline to continue, though ease, in the final quarter of 2012.

More than 80% of wholesalers continued to report increased pressures from transport costs. Pay settlements were cited as a pressure for 16% of firms. More than 60% of firms expect to increase prices over the next three months. Cash flow trends weakened although concerns over turnover and profitability remained high.

Finance

Once again most firms reported no change to investment plans; nevertheless there was a decline.

Employment

Wholesale respondents on balance, reported an unexpected net increase in overall employment levels during the thirdquarter of 2012 although a net balance expected to shed staff in Q4. A third sought to recruit staff; largely for replacement. The average pay increase in Q3 was 2.2% compared to 1.8% in Q2.

Q3 2012 / Net Balances
Up / Level / Down / Q3/12 / Q2/12 / Q1/12

Business Optimism

/ 10.5 / 47.4 / 42.1 / -31.6 / -27.3 / -23.6
Trend in actual sales / 15.8 / 42.1 / 42.1 / -26.3 / -27.3 / -11.8
Trend in expected sales / 26.3 / 36.8 / 36.8 / -10.5 / -31.9 / -5.9
Investment plans / 11.1 / 61.1 / 27.8 / -16.7 / -22.7 / -5.8

Cash flow past 3 months

/ 15.8 / 68.4 / 15.8 / 0 / -27.3 / -17.7
Turnover next 12 months / 31.6 / 26.3 / 42.1 / -10.5 / -13.6 / -11.8
Profitability next 12 months / 15.8 / 42.1 / 42.1 / -26.3 / -38.1 / -25
Price change next 3 months / 63.2 / 31.6 / 5.3 / 57.9 / 50 / 76.5
Pressures to raise prices from
Pay settlements / 15.8 / 15.8 / 9.1 / 11.8
Raw material costs / 52.6 / 52.6 / 59.1 / 82.4
Finance costs / 15.8 / 15.8 / 18.2 / 5.9
Other overheads / 31.6 / 31.6 / 36.4 / 35.3
Transport costs / 83.3 / 83.3 / 81 / 81.3

Employment trends

Total actual employment / 11.8 / 82.4 / 5.9 / 5.9 / 0 / 11.7
Expected next 3 months / 5.9 / 58.8 / 36.3 / -30.4 / -35 / -13.3

Average pay increase

/ 2.2 / 2.2 / 1.8 / 3.4
Percent recruiting staff / 35.3 / 35.3 / 33.3 / 31.3
Recruitment difficulties inc / 0 / 0 / 3.2 / 0

Scottish Chambers’ Business SurveyStrictly embargoed to 11thOctober 2012

RETAIL DISTRIBUTION

Optimism

The low levels of business confidence continued to ease marginally in the third quarter of 2012, and although the net balance remainsit is marginally better compared to Q3 2011.

Sales

The trend in sales weakened further with more than 60% of retailers reporting a decline in the total value of sales in the three months to the end of September. Only 11% reported and only 8% expect increased sales, as continuing concerns over consumer confidence remain evident.

Finance

Cost pressures remain historically high, although those concerned with increasing suppliers costs eased from 61% to 56%. Transport costs and utility costs also continued to be of particular concern. Pressures on margins remain widespread with over half expecting declining profitability and turnover over the next year.

Employment

Labour market activity continued to decline with only 8% reporting and 10% expecting an increase in overall employment levels. Recruitment problems also eased.

Only 12% of firms reported increasing pay, and the average increase was3.4%.

Q3 2012 / Net Balances
Up / Level / Down / Q3/12 / Q2/12 / Q1/12

Business Optimism

/ 10.6 / 36.4 / 53 / -42.4 / -46.5 / -62.8
Trend in actual sales / 10.6 / 27.3 / 62.1 / -51.5 / -39.3 / -52.8
Trend in expected sales / 7.8 / 39.1 / 53.1 / -45.3 / -44.5 / -47

Cash flow past 3 months

/ 7.8 / 64.1 / 28.1 / -20.3 / -22.2 / -39.4
Turnover next 12 months / 12.3 / 35.4 / 52.3 / -40.0 / -38.2 / -42.8
Profitability next 12 months / 14.1 / 26.6 / 59.4 / -45.3 / -53.7 / -60
Price change next 3 months / 51.5 / 43.9 / 4.5 / 47.0 / 57.1 / 58.3
Pressures to raise prices from
Pay settlements / 22.7 / 22.7 / 28.6 / 25
Raw material costs / 56.1 / 56.1 / 60.7 / 66.7
Finance costs / 24.2 / 24.2 / 16.1 / 22.2
Other overheads / 19.7 / 19.7 / 12.5 / 8.3
Transport costs / 43.9 / 43.9 / 48.2 / 63.9
Utility costs / 42.4 / 42.4 / 50.0 / 55.6
Regulation costs / 30.3 / 30.3 / 37.5 / 36.1

Employment trends

Total actual employment / 7.6 / 63.6 / 28.8 / -21.2 / -14.8 / -5.7
Expected next 3 months / 9.7 / 71 / 19.4 / -9.7 / -16.7 / -25

Average pay increase

/ 3.4 / 3.4 / 2.4 / 2.5
Percent recruiting staff / 37.5 / 37.5 / 33.3 / 25.7
Recruitment difficulties inc / 20.9 / 20.9 / 26.7 / 12.5

TOURISM

Optimism

The decline in business confidence declined during the third quarter of 2012 although remained less negative compared to Q3 2011.

Demand

More than half of hotels reported a fall in visitors during the three months to the end of September; and more than half anticipate a further decline in the final quarter of 2012. The trend was much worse than had been forecast by respondents from the previous survey.

Average occupancy rose from 64% to 68% although was down on the same quarters of 2011 and 2010. During the three months to the end of September 2012, trends in bar/restaurant trade and for conference/ function facilities continued to decline.

A net balance of firms had expected to increase daily room rates in the three months to the end of September but the pattern was one of continued discounts. These ‘special offers’ seem set to continue with a net balance of 23% expecting to decrease room rates in Q4 2012.

Business constraints

More than three-quarters reported that the lack of tourist demand remained the primary business constraint. Poor transport infrastructure, high fuel costs and weak marketing of the area also remained a concern to hotels.

Employment

Fewer than 20% of hotels sought to recruit staff and employment trends,as forecast,continued to decline. A net balance of 29% expect a fall in total employment levels in Q4 2012.

Q3 2012 / Net Balances
Up / Level / Down / Q3/12 / Q2/12 / Q1/12

Business Optimism

/ 12.1 / 48.5 / 39.4 / -27.3 / 0.0 / -14.3

Trends in demand/visitors

Total demand/visitors / 20.6 / 22.2 / 57.1 / -36.5 / 0.0 / -10.5
Demand from Scotland / 15.6 / 48.4 / 35.9 / -20.3 / -1.8 / -4.4
Demand from Rest of UK / 18.5 / 38.5 / 43.1 / -24.6 / -8.8 / -16.4
Demand from abroad / 23.4 / 20.3 / 56.3 / -32.9 / -8.9 / -22.9
Business Trade / 14.5 / 40.3 / 45.2 / -30.7 / -21.8 / -25.5
Trends in expected demand
Total demand/visitors / 11.5 / 36.1 / 52.5 / -41 / 5.7 / 4.4
Demand from Scotland / 14.5 / 50 / 35.5 / -21 / 1.9 / 2.3
Demand from Rest of UK / 11.3 / 46.8 / 41.9 / -30.6 / -3.7 / -2.2
Demand from abroad / 11.3 / 38.7 / 50 / -38.7 / -11.1 / -13.3
Business Trade / 10.2 / 44.1 / 45.8 / -35.6 / -19.3 / -9.3

Occupancy