SCOTTISH small and medium-sized businesses faced their toughest quarter for at least three years in the opening three months of 2017, as costs rose and a larger proportion operated below capacity, a survey signals.

Clydesdale Bank parent group CYBG and the Centre for Economics and Business Research’s newly-launched “health check” index for the small and medium-sized enterprise (SME) sector in Scotland dropped from 45 in the fourth quarter of 2016 to 41 in the opening three months of this year.

Although the index is published for the first time today, the CEBR and CYBG have compiled readings for the period from the first quarter of 2014 and the latest figure of 41 is the weakest so far.

The Scottish reading is adrift of a health check index of 46.5 for the UK as a whole in the first quarter, which was also the lowest for at least three years and was down from 56.4 in the final three months of 2016. Scotland’s reading places it tenth out of 12 nations and regions of the UK.

Graeme Sands, head of business banking at CYBG, cited the continuing impact of oil and gas sector weakness and its effect on north-east Scotland in the context of the weaker SME health check index reading north of the Border.

He also noted some Scottish SMEs “are experiencing issues due to the currency”.

Mr Sands added: “That cuts both ways. Certainly, in this report, it is showing more adverse than positive.”

The pound tumbled in the wake of last June’s Brexit vote, and a raft of other surveys have highlighted a resultant surge in costs of imported materials for businesses across a wide range of sectors. One factor pushing down the health check index for Scotland was an acceleration in the rate of increase of business costs.

Mr Sands noted the challenges presented by the fact that annual UK consumer prices index inflation has risen above the rate of increase of nominal wage growth, and cited CYBG’s view that this was putting a “small amount of pressure on consumer spending”.

However, he was encouraged by a rise in SME confidence in Scotland in the first quarter.

The health check index has eight sub-components, covering figures for bankruptcies, business costs, capacity, confidence, employment, gross domestic product, lending, and revenue.

Noting the “Brexit process” was “now beginning in earnest” and unveiling the new SME health check index, CYBG chief executive David Duffy said: “After a long period of sluggish growth and [with] Britain’s future position in the global economy set to change, securing a path to sustained and stronger growth will be critically dependent on unlocking improvements in the UK’s productivity and business competitiveness.”

Mr Duffy added: “This future economic success will depend in no small part on the strength and general ‘health’ of our SME businesses. Small and medium-sized businesses remain the engine room of the British economy, and their future prospects are likely to be ever more critical post-Brexit, when we will be dependent on a stronger and more competitive domestic economy.”

He declared this was “especially true for those national and regional economies away from London and the south-east”, including Scotland.

A separate survey of businesses published today by Bank of Scotland, covering mainly SMEs, shows a slight dip in confidence over the first half of this year.

The confidence index, based on average net balances of firms expecting rises in sales, orders and profits over the next six months, fell from 21 per cent in January to 19 per cent in June. This took it below the index for England and Wales, which rose from 14 per cent to 24 per cent.