CONFIDENCE among small businesses in Scotland and the UK as a whole tumbled in the latest quarter, as higher inflation and domestic economic weakness weighed, a key survey reveals today.

The Federation of Small Businesses’ latest survey also shows small firms north of the Border have seen another fall in profits in the latest quarter. It signals there was a slight overall fall in staffing in the latest quarter, with a further reduction in employment anticipated in the coming three months.

Annual UK consumer prices index inflation had by August surged to 2.9 per cent - from 0.3 per cent in May last year ahead of the referendum on European Union membership – on the back of sterling’s tumble following the Brexit vote.

Higher inflation and a renewed fall in wages in real terms, amid weak nominal pay rises, have dampened consumer spending growth and weighed heavily on UK economic expansion. UK gross domestic product grew only 0.3 per cent in the three months to June, after increasing by just 0.2 per cent in the opening three months of this year.

Scottish GDP grew by 0.7 per cent in the first quarter. However, the FSB noted the tumble in confidence among small businesses in the latest quarter “may suggest that the relatively strong Q1 GDP performance may be difficult to sustain”.

The FSB’s Scottish small business index, which measures confidence in terms of member firms’ views of prospects for the coming three months, dropped from -3.8 points to -15.2 points.

And the FSB’s UK small business index dropped from +15 points to +1.1 points. Only London, on about -16 points, had a weaker reading than Scotland.

Asked if he was surprised by the tumble in small business confidence north of the Border, FSB external affairs manager for Scotland Stuart Mackinnon replied: “When we speak to members, there is a degree of anxiety in the business community, and certainly the results chime with anecdotal feedback from our membership.”

FSB Scottish policy convenor Andy Willox said: “Businesses in Scotland have been pessimistic about prospects for the last seven quarters. While we saw a slight uptick earlier this year, this quarter business confidence in Scotland, and across the UK, has taken a hit.”

Mr Willox added: “Rising inflationary pressure and a weakening domestic economy are the twin drivers of plummeting confidence among UK businesses.”

He highlighted the impact of the pound’s tumble on Scottish small businesses reliant on imports.

The survey shows a growing proportion of small businesses in Scotland view input costs – including raw material prices – as a barrier to growth. And, subtracting the proportion experiencing a rise from that seeing a fall, a net 6.7 per cent of Scotland’s small firms posted a fall in gross profits in the latest quarter.

Mr Willox said: “The depreciation of sterling is still having a big impact on those firms which import goods or services, or who are part of international supply chains.”

The survey, however, signalled a slowing of the overall rate of profit decline among small firms north of the Border. In the second quarter, a net 16 per cent of small businesses in Scotland reported a fall in gross profits. And, in the latest survey, small firms north of the Border signal that, overall, gross profit is likely to neither rise nor fall over the coming three months.

A net one per cent of small firms in Scotland reported a fall in staffing during the latest quarter. And a balance of four per cent forecast a reduction in their workforces over the next three months.

Meanwhile, a net 20 per cent of small businesses in Scotland reported a fall in the value of exports during the latest quarter.

Mr Mackinnon also cited pressures on firms’ costs from rises in the national living wage, and pensions auto-enrolment, as well as uncertainty regarding future trading arrangements and access to European Union workers arising from the Brexit vote.

Mr Willox declared small firms in Scotland would be looking to Chancellor Philip Hammond to “extend a lifeline” in the November 22 Budget.

He added: “In such a difficult trading environment, new tax grabs and loss of reliefs for entrepreneurs will exacerbate existing challenges.”

The FSB said of the drop in the UK small business confidence index in the latest quarter: “The most recent downtick in confidence likely reflects the UK’s unimpressive economic performance over the first half.”