Alan Shanks

Produced in partnership with the University of Strathclyde’s Fraser of Allander Institute, the 100th edition of the report – which was first carried out in 1998 – surveyed 400 firms from across the economy and found the net balance of all core business activity indicators the final quarter of 2022 were negative, for the first time since early 2021.

However, on average firms are slightly more optimistic about their expected volume of business over the next six months, while there were also positive net balances in expectations for the level of employment and turnover in the coming six months. There continues to be a negative net balance for expected capital investment and export activity and 75 per cent of businesses expect growth in the Scottish economy to be weak or very weak over the coming year.

Around 90 per cent of businesses have seen their costs increase over the past year, many by more than 50 per cent, and the price of energy continues to have a significant impact on activity, with almost half of the businesses expecting to reduce their operations this year due to higher energy bills.

Businesses are increasingly taking their own steps to tackle this issue, with more than 60 per cent of firms reporting that the energy crisis has encouraged them to speed up making energy-efficient improvements to their business. However, a similar percentage say that price is a barrier to making these improvements – with smaller firms experiencing greater barriers than larger firms.

Notably, over the next six months total employee costs are expected to overtake energy and input costs as the biggest cost driver.

The previous report had seen businesses call for a package of support from governments to bring stability, however the support that was forthcoming did not have a huge impact on business confidence. Policy uncertainly continues to be a concern for 77 per cent of respondents, with just five per cent of businesses feeling more confident about the outlook for their business following the Scottish Budget, and only 12 per cent feeling more confident after the UK government’s Autumn Statement.

The share of firms reporting that the price of goods and services was causing supply chain issues has fallen from 71 per cent last quarter to 41 per cent in Q4 2022, indicating that many firms have potentially adjusted to the higher level of prices in the market, found cheaper suppliers, or perhaps find other issues more pertinent.

Alan Shanks, head of Scotland at Addleshaw Goddard, said: “Scottish businesses are resilient and it is reassuring to see that overall sentiment has returned to the black as we get into 2023. However, no one can be under any illusions about the continuing impact of the ‘cost of doing business crisis’ and the barriers to growth in individual sectors as well as the overall economy.

“The value of the Scottish Business Monitor is to take the pulse of businesses across the economy, in good times and difficult times, and then look at what can be done to improve the situation. Whether it is policy levers or actions that businesses can take for themselves, both require ingenuity and support, financial and otherwise, to make an impact.

“With financial support set to be reduced for many businesses through the new Energy Bill Discount Scheme, the trend in firms taking their own steps to tackle the energy costs issue, for example, is something we are seeing within businesses we advise and it can bring long-term efficiencies, certainty and financial benefit.

“While the findings of some of the recent Scottish Business Monitors have made tough reading, it is crucial to know what is front of mind for those at the sharp end of running businesses. That’s why we have partnered with Fraser of Allander to carry out these surveys and it is remarkable achievement for the Institute to mark 25 years and 100 editions of the report.”

Professor Mairi Spowage, director of the Fraser of Allander Institute, said: “Although business sentiment is up on last quarter, 2023 will inevitably be a tough year for Scottish firms, particularly when government support is rolled back come April. Despite relative optimism among businesses this quarter, it is clear from our latest survey that firms feel let down by government and feel that they require further support to get them through the year.”