By Kristy Dorsey

Restoration of economic growth across Scotland is “now clearly at risk” as rising costs, recruitment challenges and the return of Covid curtailments combine to depress business profitability, the Scottish Chambers of Commerce (SCC) has said.

In the SCC’s Quarterly Economic Indicator covering the final three months of 2021, businesses reported significant declines in both cashflow and profits compared to the third quarter. This was the case across all sectors, with manufacturing, retail and tourism hit particularly hard.

Business optimism across the board was higher than in the same period a year earlier, but fell relative to the third quarter in every sector except construction. Retail, manufacturing and business services reported marginal improvements in exports, though activity remains at historically weak levels amid the impact of Brexit and the ongoing pandemic.

Commenting on the business optimism figures, SCC president Stephen Leckie noted that the latest research was conducted prior to the reintroduction of restrictions in the second half of December. Sentiment therefore remains “highly volatile” and subject to trading limitations imposed to keep the Omicron variant of Covid under control.

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“The continued strong return to economic growth many businesses might have expected in the next quarter is now clearly at risk and the recovery could now take longer than hoped for due to continued uncertainty over what economic deterrents are likely to remain in place and for how long,” he said.

“As Scotland adjusts to ‘living and working with Covid-19’ and the threat of new variants, it’s vital that the Scottish Government develop an economic recovery plan, in collaboration with business, which allows the economy to reopen fully and ends the continuous threat of a return to restrictions, allowing businesses to make a comeback in the months ahead.”

With inflation hitting its highest rate in 10 years at 5.1 per cent, rising costs for raw materials and goods is further dragging on profitability. Rising energy prices, increases to National Insurance contributions, and the removal of VAT and business rate reductions for hospitality and tourism are also increasing the pressure on firms, Mr Leckie said.

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The end of furlough appears to have had little impact on increasing the availability of workers as firms in the construction, financial services and retail sectors are experiencing recruitment difficulties amid labour shortages.

Mairi Spowage, director of the Fraser of Allander Institute, said expectations for the outlook in 2022 and beyond are still “much better” than was feared earlier in the pandemic.

“However, what is emerging are early signs that Scotland’s recovery may be lagging behind that of the UK as a whole,” said Ms Spowage, whose organisation helps to produce the SCC’s quarterly study. “The impact on employment and wages in the north-east stands out as a particular concern, given the importance of high-wage oil and gas jobs in that region.

“What is clear is that we are not past the point where government support for various sectors is likely to be required in order to reduce long-term scarring on the economy.”