Greece debt crisis: How it is affecting Scotland

Vishal Chopra, tax director at Grant Thornton shares his thoughts on how the Greece debt crisis is impacting business confidence across Europe and in Scotland.

Since the start of Greece’s debt crisis in 2009, the country has seen frequent protests and strikes against the government’s proposed austerity measures. In recent weeks, bank closures, the stopping of emergency funding and prospect of an EU bailout have dominated international news cycles. But how has this impacted business across Europe and closer to home?

The confirmation of Greece’s continued membership in the EU was welcomed by financial markets. However, what is notable given the ongoing timeframe of the crisis is that overall business optimism doesn’t seem to be affected.

In fact, optimism grew last quarter across the Eurozone. According to the Grant Thornton International Business Report (IBR), business confidence increased by 20 percentage points, beating pre-crisis highs.  

The uncertainty surrounding Greece’s future and membership of the EU is by no means over, but it’s encouraging to see that this hasn’t impacted the wider European economy. Germany is now the most optimistic economy in the IBR at 92% (Q1= 59%) and businesses in the UK, Spain, France and Italy have also posted significant improvements in their outlook during the last quarter.

Business leaders across Europe have been here before and banks are also better placed to cope by increasing capital buffers. However, although Greece accounts for less than 2% of GDP across Europe, businesses should ensure robust contingency plans are in place should further defaults on Greece’s debt payments cause an unplanned exit from the EU. 

Supported by strong revenue and profit growth expectations, businesses are forecasting a strong 12 months. Despite the outcome of the referendum in Greece, European businesses will remain optimistic. They seem to be looking past the issue and this demonstrates just how resilient they can be.

There is a virtuous circle here: rising revenue and profitability growth are very welcome signs for the regional economy, particularly given ongoing political uncertainty, and increasing salaries are a sure sign that businesses believe the recovery has truly taken hold. Higher salaries should boost consumption, further boosting business growth.

Europe is not alone in its sentiment that the next 12 months will be good for business. The three largest economies in the world – The United States, China and Japan – all saw sharp upswings in optimism. 

Closer to home, despite growing global optimism, business confidence in Scotland is in decline.   

Grant Thornton’s Business Confidence Monitor (BCM) in June found that confidence in Scotland had fallen into negative territory for the first time in three years, and with a score of -7.4, is well below the UK average of +16.6 for Q2. Whilst Scotland is historically resilient, it’s clear that the Scottish business community and economy has its own challenges.

Scotland’s declining business confidence is perhaps linked more to our local political concerns than those elsewhere in the world.  Implications following the Independence Referendum and recent budget announcements, such as newly devolved tax powers, as well as our own uncertainty around continued EU membership, will have an impact.

Scottish businesses have experienced a sustained slowdown across a range of key financial performance indicators and do not anticipate things to improve in the immediate future. For example, the BCM report found that turnover growth is expected to drop from the 3.4% recorded over the past year to just 1% over the next 12 months. Export growth has also seen a notable decline in recent quarters - overseas sales increased by just 0.6% over the last 12 months, compared with a 3.1% increase in the year to Q2 2014. 

The significant drop in confidence is concerning, particularly given Scotland is the only part of the UK showing such a marked negative trend. This impacts that virtuous cycle whereby recruitment is limited and unemployment figures rise, consumption drops and growth is restricted. The declining North Sea oil and gas industry is having a huge impact on the Scottish economy for example.

Despite this drop in confidence, now is the time for Scottish businesses to demonstrate their resilience and tenacity like our European neighbours. Business growth feeds on confidence - the confidence to make an acquisition, to expand abroad, to hire new people. Like the Greek debt crisis, Scotland’s socio-political challenges are by no means over and business leaders need to take the risk now to avoid further decline in the future.