Despite the impact of the Omicron variant over Christmas, the Scottish economy grew by 1.1 per cent in January, bringing output at the turn of the year above pre-pandemic (February 2020) levels.

While this recovery marks an important milestone, 2022 will undoubtedly be a difficult year for many businesses as supply chain disruptions continue and inflationary pressures worsen.

It is important to note that prices were increasing throughout 2021, particularly in autumn, due to global gas shortages driving up energy costs.

Gas is used to fuel around a third of the UK’s electricity generation, which means that rising gas prices have led to an increase in the cost of electricity, increasing total energy bills for businesses. Rising fuel prices have also made transporting goods more expensive, increasing cost pressures further for businesses.

But it is not just the cost of transportation that is causing supply chain issues for firms, it is also the general availability of goods, services, and labour that have been key challenges over the past year.

In light of this, at the start of the year, as part of our quarterly Scottish Business Monitor, we asked Scottish firms about their opinions on current economic conditions.

The Fraser of Allander Scottish Business Monitor, in partnership with Addleshaw Goddard, is a quarterly survey of around 500 Scottish businesses. It has been running since 1998 and allows us to gauge business sentiment ahead of official measures of the Scottish economy.

Our survey results, covering the last quarter of 2021, highlight that more than one in five firms are struggling to recruit the staff that they need with skills mismatches creating the greatest challenge for firms.

But firms are not just struggling to attract new staff, they are facing difficulties retaining their workers. One in five firms reported difficulties in retaining existing staff.

In addition to sourcing and retaining talent, more than half of Scottish businesses are struggling to source the goods and services that they need. The manufacturing sector appears to be the hardest hit by supply chain issues, followed by professional services, wholesale, and construction firms.

Global supply chain issues are expected to feed into the prices charged by Scottish firms in 2022.

Over 80% of businesses reported that they expect to increase their prices by more than or a lot more than normal this year. Price hikes are mainly expected in the construction and transport and storage sectors, with 9 in 10 firms reporting that they expect their prices to rise in 2022.

While some firms are expected to pass on increasing costs to consumers, others anticipate having to reduce their output to cope.

We asked businesses about price increases in the energy sector and how this would likely affect their business operations. One in 5 businesses expects to reduce their operations in some capacity this year due to higher energy bills.

This was particularly prominent in the accommodation and food services sector – a sector hard hit by Covid-19 restrictions - with 1 in 3 firms expecting to reduce their operations in some way.

The resilience of sectors that were hit hardest during the pandemic is once again being tested.

The ongoing effects of Brexit, the pandemic, and now the crisis in Ukraine are making it increasingly difficult for firms to source goods and receive them on time.

Global supply chain pressures continue to be among the highest they have been in over two decades with international shipping taking more than double the length of time it took in 2019.

Owing to heightened supply chain issues, inflationary pressures have intensified.

In the 12 months to February 2022, input costs for UK producers rose by 14.7%, just shy of the highest rate since records began in 1997. The Office for Budget Responsibility expects high inflation – well above the Bank of England’s 2% target rate – to persist for the next couple of years.

Last month, in an effort to calm inflation, the Bank of England’s Monetary Policy Committee decided to increase the base rate from 0.5% to 0.75%. With the base rate now at the highest level since March 2020 – although historically still very low – the affordability of credit tightens for businesses.

These challenges come just as the economy appears to be recovering from the pandemic, and households and businesses are learning to live with Covid-19.

During the pandemic, valued-added tax was cut to 5% for the hospitality sector, rising to 12.5% in October of last year – targeted support for one of the hardest-hit sectors of the economy. At the beginning of this month, this tax relief support ended for the sector.

While the Scottish economy as a whole is now 0.8% above pre-pandemic levels, output in the accommodation and food services remains below that seen in February 2020.

This month, the price cap on energy bills increased once again, tightening the purse strings of millions of households in the UK. In times of financial hardship, households typically cut back on social spending by going out for fewer meals and drinks than in normal times.

With the cost of living crisis worsening the same month that hospitality support ends, April will be a tough month for businesses in this sector. It is expected that the rest of the year will be a difficult one for businesses in hospitality.

The Scottish Business Monitor results covering the first quarter of 2022 will be published in the next few weeks, and it will be interesting to see how business sentiment has changed since our last survey.

Adam McGeoch is a knowledge exchange associate at the Fraser of Allander Institute, specialising in business analysis and engagement