STRONG competition for labour and skills are now the biggest cost pressure and driver of prices rises, the Scottish Chambers of Commerce (SCC) has said as it calls on improved access to the international labour market so that businesses can address worker shortages.

SCC president Stephen Leckie said that such fierce competition for labour and skills was also leaving many firms with job vacancies that they simply can’t fill. “Pressures from a tight labour market are making it difficult for firms to fulfil orders and inflation is placing great pressure on businesses to meet growing demands for higher wages,” he noted.

“We are rightly focused on ensuring our domestic skills and labour are supported into the jobs market, with many initiatives and reforms under way. However, businesses cannot wait for these schemes to pay dividends which could take years."

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Commenting in the SCC’s Quarterly Economic Indicator report for Q2 2023, Mr Leckie noted: “That’s why we need to simultaneously accelerate plans for improved access to the international labour market so that we can address worker shortages. This action alone would lift some of the pressure facing businesses and demonstrate that we have a UK Government which listens to business.”

The Q2 report, in partnership with the Fraser of Allander Institute, noted that cost pressures around labour costs were cited by three-quarters of firms that responded to the survey, and also revealed that interest rates are the second-largest concern behind inflation, impacting 40% of all firms. It also pointed to a sharp contraction in housebuilding activity.

Mr Leckie noted that while investment growth is “positive but significantly subdued, with most firms reporting no change to investment levels”, the survey results highlight the “uncertainty” many businesses are grappling with.

“Persistent economic uncertainty is forcing firms to put investment decisions on hold, which makes prospects for medium and long-term growth far more challenging,” he said. “The flatlining performance across the business community must act as a wake-up call to governments north and south of the Border.

“Governments must work with us if we are to revive investment decisions and maintain our competitiveness as a business destination.

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“Firms are now increasingly feeling the impact of consistent interest rate rises by the Bank of England attempting to cool inflation. Up to this point, businesses have had to adjust to seeing interest rates mainly squeeze their borrowing and input costs but now they are increasingly feeling the pinch in other ways, with consumer spending stifled and now the housing market coming under pressure.

“It is critical that the right balancing act is struck from the Bank of England on interest rates or there is a threat that spiralling interest rates will make repayments simply unsustainable in the medium and long-term. Governments must also consider what regulations and upfront costs can be reduced or paused to reduce the costs burden on business such as a temporary reduction in VAT.”

Mr Leckie, who is chief executive of Crieff Hydro Family of Hotels and also chairman of the Scottish Tourism Alliance, pointed to the Scottish Government’s recently established New Deal for Business Group and said that the “eyes of the business community are firmly on how the First Minister will respond to the New Deal for Business recommendations”.

“Specifically,” he added, “how he will reform non-domestic rates to incentivise businesses to grow as well as find the right balance between taxation and spend?”.

On price rises, the survey found that while inflationary pressures are “easing”, inflation is still too high with most businesses still expecting to increase their prices in the next quarter.

“Firms are now increasingly feeling the impact of consistent interest rate rises by the Bank of England attempting to cool inflation,” noted Mr Leckie. “Up to this point, businesses have had to adjust to seeing interest rates mainly squeeze their borrowing and input costs but now they are increasingly feeling the pinch in other ways, with consumer spending stifled and now the housing market coming under pressure.

“It is critical that the right balancing act is struck from the Bank of England on interest rates or there is a threat that spiralling interest rates will make repayments simply unsustainable in the medium and long-term. Governments must also consider what regulations and upfront costs can be reduced or paused to reduce the costs burden on business such as a temporary reduction in VAT.”

However, Professor Mairi Spowage, director of the Fraser of Allander Institute, said that despite the latest data showing little movement, “we still expect that inflation will come down as we move through 2023 as we compare to the higher price levels in 2022”, noting: “This chimes with the expectations in the survey today, albeit there are significant sectoral variations.

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“The expectations are that inflation will get down to around 5% by the end of 2023 – meaning that while the Prime Minister may meet his commitment to halve inflation it is looking much closer than it did before. It is now not likely to be until 2025 when inflation gets back to the Bank of England’s target level of 2%.

“So, despite the fact we are not in technical recession, it is still going to feel like a period of pain for many businesses.”