Scottish Chambers of Commerce’s president says Westminster must introduce a flexible migration system so businesses can “hire and attract the international workforce” and the Scottish Government should take steps to attract older people back into the labour force.

Stephen Leckie, presenting the findings of the business organisation’s latest quarterly survey published today, declared that “persistent challenges over access to labour and retaining talent are beginning to take precedence as a leading concern for firms”.

Mr Leckie, who is chairman and chief executive of the Crieff Hydro hotels group, highlighted his belief that both the Scottish and UK governments “need to act quickly to alleviate the challenges in the workforce”.

He said: “At Westminster, we need to see a flexible migration system which aligns with economic need so businesses can hire and attract the international workforce to live and work in the UK. With more vacancies in the UK than people available to fill them, this is an essential route that cannot be avoided if we are serious about economic growth.”

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Mr Leckie added: “At Holyrood, we have called for measures to tailor elements of the careers service offering to bring older workers back into the workforce, alongside measures to offer more opportunities for economically disadvantaged individuals, to support the competitiveness of Scottish businesses.”

He declared the end of 2022 had been a “bleak period” for businesses, as Scottish Chambers’ survey for the fourth quarter highlighted cost pressures and declining optimism.

Every sector reported a fall in confidence in the fourth quarter of last year, with retail and tourism experiencing the sharpest fall in optimism compared with the previous quarter.

Scottish firms which were surveyed flagged the cost of labour as the main expense pressure, with 72% citing it. Concern over fuel costs and raw material prices remains high, Scottish Chambers noted, being flagged in each case by six out of 10 firms. Worry over interest rates was flagged by 50% of businesses surveyed, a steep increase from the preceding quarter.

Of firms surveyed, 82% indicated they intended to raise prices over the next quarter. Scottish Chambers, which conducts its survey in partnership with the University of Strathclyde’s Fraser of Allander Institute, noted this was a record level.

Mr Leckie said: “The end of 2022 turned out to be a bleak period for Scottish businesses. All sectors are coming under immense strain because of upfront costs which are hitting cash flow and profits. Additional cost pressures are adding to this burden, particularly with rising staff costs, which is leading the majority of businesses to raise prices.”

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He added: “There can be little doubt that recessionary effects are dragging the Scottish economy away from recovery and growth.”

Mr Leckie observed that the survey results “paint a particularly worrying picture for the retail and tourism sectors with contractions in future sales and investment intentions”.

And he noted that “as relief packages come to an end, businesses are extremely concerned, particularly on energy prices which continue to be volatile”.

Mr Leckie warned the UK Government’s reduction of support for businesses on energy bills from this spring meant this would “now be a cost too far” for some firms.

He said: “Energy bills continue to be a significant cost pressure for firms. While the survey shows that the energy bills relief scheme has helped since it came into effect in October, the lack of further support is a major cause for concern.

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“The successor to the energy bills relief scheme...will see an 85% drop in the financial envelope of support – which will fall short for thousands of Scottish businesses who are seriously struggling. While we welcome the 12-month duration of this package, the value is nowhere near enough and that means for some firms energy will now be a cost too far.”

Mr Leckie said Scottish Chambers “would urge the UK Government to revisit the relief package urgently”.

Around half of all firms reported falls in cash flow and profits during the fourth quarter, Scottish Chambers noted. Only 30% reported an increase in cash flow and 18% posted a rise in profits.

And Scottish Chambers noted every sector had reported a “sizeable contraction in cash flow and profits” when compared with the fourth quarter of 2021.

The construction sector saw a contraction in work-in-progress for the first time since the second quarter of 2020, when the industry was “largely inoperative” because of the Covid-19 pandemic, Scottish Chambers observed.

Mairi Spowage, director at the Fraser of Allander Institute, said: “Setting out the economic and fiscal context can currently feel a bit like groundhog day, with concerns about economic conditions simply seemingly [getting] worse as we kick off 2023. The consensus now is that the UK and Scottish economy are in recession, and the only debate among forecasters is exactly when it starts and how many quarters long it will be.”

She added: “Front and centre for both consumers and businesses are of course energy costs. While the UK Government has put in place very costly help for both groups, it does mean that there is much more pain still to come in April. The energy bill discount scheme announced last week is much less generous than the scheme in place before the end of March, and will see energy costs for some businesses potentially double yet again.”

Ms Spowage observed “the story of increased costs is not just about energy”, declaring: “Labour market costs are also a significant part of the story.”

She noted the latest official earnings data published this week showed annual pay growth in the private sector in Great Britain was 7.2% in the three months to November.

Ms Spowage said: “In the last few months we have seen falls in the number of vacancies in the UK compared to the heights of the summer, but there is still an incredibly tight labour market, making vacancies very hard to fill and pushing up costs.”

However, she added: “We must be positive about the ability of Scottish businesses to weather the storm – they have proven their resilience over the past three, very challenging, years. What is clear is that they will have to draw on that further during 2023.”