Businesses in Scotland have reported deteriorating conditions across every headline measure with nearly half having cancelled or delayed planned investments during the past year.

The latest Scottish Business Monitor produced by Addleshaw Goddard and the Fraser of Allander Institute found that more firms have seen a decline in activity than have seen an increase. However, a positive balance expect the volume of activity to increase in the next six months.

The report for the third quarter of this year found fewer companies citing affordability and economic uncertainty as reasons for putting off investment plans, while government policy decisions have increased as a factor. Of the 323 firms surveyed, 36% mentioned government policy, up from 30% previously.

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Latest official statistics released in November show that Scotland avoided recession this year, but growth remains weak. The third quarter of the year saw growth of 0.4%, though this slowed to 0.1% by the end of the period in September.

“The deterioration across every headline measure we collect in the survey is a concern, but chimes with many other signals we are seeing in the economy of things slowing down as we move into the winter," said Mairi Spowage, director of the Fraser of Allander Institute.

"These difficult investment conditions mean that the Autumn Statement announcement that full expensing is being made permanent will be especially welcomed by many businesses – bringing a bit of certainty to an uncertain environment.”

The majority of delayed or cancelled investment has been in physical assets (74%) but firms also highlighted investment in the workforce (41%) and technology and information systems (36%). 

Looking ahead, 42% of firms they are likely to engage in business investment during the next 12 months. Almost 80% of those firms said they would use their own funds, with only 10% pursuing a bank loan, and as little as 4% considering private equity.

Laura Falls, corporate partner at Addleshaw Goddard in Scotland, described the investment statistics as "stark" given that that this has been identified as a significant factor in the Scottish economy's relatively low levels of productivity and economic growth.

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"Some of that may be in part due to the fact that businesses are still largely focused on funding investment through their own means, rather than what they may see as the risk involved with seeking external backing," she added.

"As someone who regularly works with businesses exploring other forms of investment, including private equity, it is clear that there is still some way to go to align the need for capital injection in Scottish businesses with the opportunities that exist to fund growth plans."

In other key findings, two out of three firms said costs continued to increase during the third quarter, with wages the biggest source of pressure. Energy costs eased slightly but remain a concern for the vast majority, with half of firms expecting these to rise again in the coming six months.

Recruitment challenges remain persist and a quarter of businesses further reported difficulties in retaining current staff. Nearly three-quarters are more concerned than normal about staff retention.

On a more positive note, the number of firms expecting the cost of credit to increase came down to 38% in the third quarter, compared to 50% in the previous three months. The easing in supply chain issues also appears to be continuing, with 24% of firms finding it difficult or very difficult to source goods and services, well down from the peak of 52% in the final quarter of 2021.