SCOTTISH manufacturers recorded their sharpest drop in optimism since 2012 in the fourth quarter of last year, as their orders fell and they cut back on staffing and investment amid Brexit uncertainty, a key survey reveals.

The survey, published today by Scottish Chambers of Commerce in collaboration with the University of Strathclyde’s Fraser of Allander Institute, shows manufacturers saw a drop in orders from Scotland, the rest of the UK and overseas in the fourth quarter. And Scottish manufacturers reduced employment significantly in the fourth quarter, having increased it in the preceding three months. Of manufacturers surveyed, 31 per cent reported a drop in employment and only 24% recorded a rise, with the rest keeping staffing levels unchanged.

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The survey also signals that manufacturers cut investment significantly in the final three months of last year, having raised it slightly in the third quarter. In the fourth quarter, only 14% of manufacturers increased investment, with 26% cutting back. Revenue and employment growth slowed in the fourth quarter in Scotland’s key financial and business services sector, the survey shows. Optimism fell in the retail and wholesale sector north of the Border in the fourth quarter, as sales revenue growth slowed sharply.

The survey also signals a sharp slowdown in growth in the Scottish construction sector, which recorded a slight reduction in employment in the fourth quarter following a sharp rise in the preceding three months.

Neil Amner, who chairs Scottish Chambers’ economic advisory group, said the impact of the need for businesses to have to deal with distractions relating to Brexit represented a “real concern” for the economy north of the Border.

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Professor Graeme Roy, director at the Fraser of Allander Institute, said: “The latest results from the Scottish Chambers of Commerce quarterly economic indicator show Brexit uncertainty is increasingly casting a shadow over business activity in Scotland.

“Whilst many businesses remain relatively resilient in terms of their day-to-day activities, levels of optimism have slipped. Unsurprisingly, manufacturers have become more pessimistic in their outlook as the prospects of a no-deal Brexit have risen.”

Mr Amner said: “The survey shows that the ongoing political uncertainty over Brexit has translated into business uncertainty, even having an impact on those who do not directly trade with other EU states.”

He declared businesses of all sizes were incurring costs they would not otherwise have done, including, but not limited to, creating stockpiles.

Mr Amner added: “There are practical as well as financial repercussions of this, including in a no-deal [Brexit] scenario. It is becoming clear there will ultimately be costs to be borne or passed on, and in the interim the preparations businesses are having to make are a distraction from other priorities. The effect of the need to deal with those distractions, combined with a scenario of investment decisions being put on hold, represents a real concern for the Scottish economy.

“With so much of our economy intertwined directly or indirectly with the EU and with many, in particular small and medium-sized businesses, struggling with how to prepare, the SCC can see that business will not welcome a no-deal Brexit.”

He described the survey results from the manufacturing sector as “downbeat”.

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Mr Amner said: “The unexpected fall in orders from Scotland, [the] rest of the UK and internationally shows the direction of travel for the sector which appears likely to persist throughout 2019. Investment also showed signs of easing and profitability declined as raw material prices act as a significant cost pressure. Looking ahead, sales, investment, exports and profits are set to follow a downward trajectory with exchange rates cited as the leading concern for the quarters ahead. Whilst Brexit is a factor for manufacturing, there are global economic trends at play too.”