Every sector across the Scottish economy recorded a double-digit increase in the number of businesses in "significant" distress in the final quarter of last year, with pandemic-related financial aid masking the true picture of those in most critical hardship.

The latest Red Flag Alert report from insolvency and recovery specialist Begbies Traynor paints a grim picture of the outlook for many firms, while also warning that the figures are likely only "the tip of a very large iceberg". With strict lockdowns remaining in place in Scotland until at least mid-February - but likely to continue for many weeks or months thereafter - the situation will "remain bleak over the next quarter and beyond".

Every one of the 22 sectors in Scotland monitored by Red Flag Alert experienced double-digit increases in "significant" distress in the final quarter of 2020 when compared to the same period a year earlier. Indicating the onset of financial problems, "significant" distress in Scotland increased by 14 per cent between the third and fourth quarter of last year, slightly above the UK-wide increase of 13%.

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Meanwhile, the number of Scottish firms experiencing the earliest signs of distress soared by 30%, with almost 33,000 now in this bracket.

By contrast, the country experienced a 40% fall in businesses experiencing "critical" distress, which refers to those that have had winding up petitions or decrees totalling more than £5,000 against them. There was also a 19% fall in those with "advanced" signs of distress.

But Ken Pattullo, managing partner for Begbies Traynor in Scotland, cautioned that the coronavirus pandemic has reduced court activity and thus limited the number of decrees and winding-up petitions being issued against indebted companies. There has also been a ban on winding-up petitions for Covid-related debts.

HeraldScotland: Ken PattulloKen Pattullo

“It is extremely worrying to see such a huge rise in signs of early distress with so many Scottish companies struggling in the face of a continued fall-off in trade after nine months of almost constant Covid restrictions," Mr Pattullo said.

"While instances of more advanced signs of distress have actually fallen, this is probably due to the Government’s insolvency prevention measures which, together with pandemic-related financial aid, are masking the true picture. We fear that the latest research indicates escalating distress with more economic problems being stored up for further down the line, once these support measures are withdrawn.”

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Scotland’s financial services sector was particularly badly hit with a 47% year-on-year and 26% quarter-on-quarter increase in "significant" distress. And despite the booming residential property market, the whole real estate and property sector – a key indicator of the economy’s performance – saw significant distress rise by 35% compared to the fourth quarter of last year.

Scottish construction businesses have also seen an impact, despite activity being able to continue during lockdowns, with a 30% increase in early signs of distress year-on-year.

Scottish hotels saw a 30% rise in early distress the compared to the fourth quarter of 2019. However, Mr Pattullo said those numbers are likely to be understated due to the short-term financial support options available which will be keeping thousands on artificial life support.