Business confidence in Scotland dropped below the UK average but remained in positive territory in the final quarter of last year as sales and profits were stronger than elsewhere.

As measured by the business confidence monitor produced by the ICAEW accountancy body, sentiment in Scotland fell to 2.0 in the final three months of 2023, down from 6.4 in the previous quarter. This suggests Scottish firms are less confident about their prospects than those elsewhere in the UK.

However, Scotland bucked the UK trend of slowing domestic sales growth with an annual rate of 5% reported in fourth quarter versus a UK rate of 3.6%. The higher rate is expected to continue in the coming year.

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Export sales in Scotland were also up on the year before and are set to grow at a faster pace than anywhere in the UK.

As a result of rising selling prices and strong domestic sales, Scottish businesses achieved profits growth of 3.3%, outstripping the UK average. Again this trend looks set to continue with profits growth expected to reach 5.3% in Scotland over the next 12 months compared 4.6% for the UK.

However, the ICAEW said Scottish companies also reported a number of growing challenges.

The majority of businesses said they were struggling with regulatory requirements and two-fifths said they had difficulties with marketplace competition - both the highest rates in the UK. Additionally, almost one-third of respondents reported challenges in recruiting non-management skills.

Around a quarter of Scottish businesses reported struggling with customer demand, although those concerns eased in the fourth quarter and the issue is more prevalent elsewhere in the UK.

The survey also found that input price inflation may have peaked in Scotland and was down from its record high in the previous quarter.

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Cost pressures are set to reduce in the coming year, but to a slower rate than the UK average. Scottish firms said they expected salary and employment growth in the year ahead to be among the highest in the UK. 

Reflecting an optimistic outlook, capital investment spending in Scotland in 2023 was among the highest in the UK, and is set to grow faster than anywhere else over the coming year. Firms north of the Border continue to raise their research and development budgets, and though that is expected to moderate in the coming year, the projected rate of increase keeps Scotland among the top performers in the UK. 

“With economic concerns continuing to weigh on Scottish businesses, the business confidence monitor presents a mixed picture, with sentiment down although still positive, and strong sales and profits growth which is set to continue," said David Bond, ICAEW director for Scotland.

“Nevertheless, Scottish companies say they face a range of challenges, with the majority of our firms devoting too much time and energy to regulatory requirements.”