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Corporates in Scotland are well positioned to ride out the economic storm and then emerge ready to invest in the future. Jamie Grant explains why he’s feeling positive about the outlook for 2023.
Head of Scotland, Barclays Corporate Banking
Our new state-of-the-art Glasgow campus is a very clear demonstration of our commitment to Scotland and in 2022, our first full year of operations from there, we were delighted to achieve a record number of new client acquisitions.
I think that reflects a vibrant business environment generally, but 2022 was definitely a year of two halves: all sectors experienced a Covid-19 bounceback to some extent – with hospitality and leisure (H&L) doing particularly well through the summer – and there was lots of positivity. With strong liquidity on the balance sheets, many businesses we talked to were eager to invest in new products, new markets or automation to tackle workforce shortages.
Then the effect of sanctions relating to Russia’s invasion of Ukraine started to take effect, and supply chain issues and runaway inflationary pressures over the second half of the year put thoughts of investment on hold for many, while our business leaders focused instead on how they could drive margin efficiencies and diversity their income streams.
The latest Government energy support package will see the Price Cap removed at the end of March for businesses in England, Scotland and Wales, replaced by a new discount mechanism based on wholesale prices. All businesses are likely to see a rise in costs although energy-heavy sectors will see higher discounts available. In the short term, cash and profits could be impacted and some businesses may look to increase prices or reduce costs and energy consumption to try and maintain margins.
Whilst investment in longer term solutions may hit corporates as an extra cost in the short term, it might also be imperative for businesses to look at how they can future-proof their running costs by developing a more sustainable/renewable approach to their energy consumption. With sustainability high on the agenda for many businesses, it is important that the cost of doing business does not overshadow this important transition. For projects with long-term sustainability at the core, sustainable financing may be a suitable option to support any immediate shortfall in cashflow.
The challenges of 2022 will no doubt persist in 2023 and lots of businesses we speak to are anxious about fragile consumer confidence.
Looking at some of our key industry sectors, I think healthcare, probably more than any other, will continue to struggle with staffing issues, while the real estate market is facing some fairly strong headwinds, such as the urgent need to upgrade rental properties to qualify for the requisite energy performance certificate ratings.
The current rent cap and a prohibition of evictions introduced by the Scottish Government could potentially discourage some housing developers from putting more stock into the market, as well as impact private landlords. At the same time, the high cost of materials means housing construction will continue to be sluggish.
I think it’s also going to be a tough time for charities, with relatively little disposable income available to potential donors to put towards worthy causes.
We’ll be keeping a watching brief as well on the H&L sector during Q1, which could be very slow as people count the cost of their Christmas and new year celebrations. However, I expect activity to pick up again by the summer – after all, Scotland is fabulous place to holiday and foreign exchange rates will make it attractive to inbound tourists, especially from the US.
While continuing inflation may dissuade people from going out quite so often to bars and restaurants in 2023, when they do, I think they will look for a premium experience. There’s opportunity there for H&L businesses that can adjust their offerings and get them right. Talking of premium products, we expect the whisky industry to once again do well in 2023 with expected growth of 5-6%.
The locations of the country’s two freeports – or green ports as they’re called in Scotland – have been announced as Cromarty and the Forth, with the tax breaks afforded to these special status zones designed to boost economic development.
While labour and costs will continue to be issues for manufacturers, 2023 should be a good year for the aerospace sector, hi-tech and digital products, farming and food. For real estate, residential sales will be robust in certain areas and the changing nature of our high streets, to more mixed use, also presents opportunities.
Some businesses I talk to say it's more a case of survive than thrive at the moment, but I think management teams at many companies have learned how to be agile and lean during Covid-19, which is good news.
What also gives me confidence is that liquidity for corporates in Scotland is still very strong and that should give businesses time to pull through the present challenges to trading performance without too much trouble. When you put good management together with good liquidity it’s a profile that should mean a business is in a good position whatever the economic backdrop.
I feel positive about 2023 and Barclays will continue to do its very best in supporting our clients’ growth agendas – and at the same time we will be working hard to look after the businesses that are going through a little bit of turbulent waters, making sure that they've got the right working capital structures in place, they’ve got the debt structure correct and they've regular contact with our relationship teams to provide the help they need.
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