Businesses in Scotland are optimistic about their prospects after a tough start to the year but say the UK Government must ensure the conditions are in place to help firms to tackle the problem of low investment.

With a general election due to be held within months, firms want the next administration to prioritise long term economic growth by removing key obstacles to expansion experts said.

João Sousa, at the University of Strathclyde’s Fraser of Allander Institute said the main concern for businesses is the continued poor outlook for capital investment.

“Scotland and the UK as a whole already have lower levels of investment than other advanced economies, and unlocking the factors holding back investment is key to sustained economic growth,” he said.

“This interacts with the risks around political uncertainty that worry businesses, and it will be crucial for political decision-makers to act in a way that reduces that perceived risk in the months ahead.”

Mr Sousa was speaking ahead of publication today of the latest Business Monitor report produced by Addleshaw Goddard law firm with the Fraser of Allander Institute.

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The report found that key constraints firms want ministers to tackle include labour and skills shortages and UK taxes on business.

Action in these areas will make it easier for businesses to recruit staff and to fund investment in assets such as IT systems to support growth.

Businesses also reckon the next Governmment will need to improve the infrastructure that firms and their customers rely on.

Alan Shanks, Head of Scotland at Addleshaw Goddard, said the latest results show just how important proper stewardship of the Scottish and UK economy is to the Scottish business community.

The Herald: Alan Shanks Head of Scotland Addleshaw GoddardAlan Shanks Head of Scotland Addleshaw Goddard (Image: Addleshaw Goddard)

The results highlight the scale of concern about political and economic uncertainty and staff availability among businesses following a period in which operating conditions have been challenging.

They cover a period during which firms have had to deal with the fallout from the surge in inflation, which led to increases in their costs and prompted customers to cut spending.

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Addleshaw Goddard noted: “All of the survey's regular activity measures - sales, new business, turnover employment, capital investment and exports - were in negative territory for the first time since the end of 2022.”

While official figures show the inflation rate has fallen markedly in recent months the survey found cost pressures had intensified for firms in Scotland.

Some 83% of respondents had seen costs increase in the latest period, compared with 78% in the preceding quarter.

Staff costs represented the biggest challenge, with 76% of businesses reporting an increase in wages bills.

Conditions appear to have got bad enough to prompt firms to cut jobs. More firms reported a fall in the level of employment than reported an increase. A net balance of firms reported an increase in employment levels for most of 2023.

However, firms may believe trading conditions are set to improve.

Addleshaw Goddard said firms are increasingly upbeat in terms of expected domestic business volumes over the next six months, new business activity, turnover and employment. Many are braced for a fall in exports, however.

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Fraser of Allander’s Mr Sousa concluded: “This quarter’s results were a bit of a mixed bag, with businesses noting that economic activity had fallen but expecting it to pick back up in the coming months. This is good news for the quarters ahead, and in line with our expectations of moderate growth for 2024 as a whole.”

The annual rate of Consumer Price Inflation fell to 3.2% in March from 3.4% in February the Office for National Statistics said yesterday.

The rate was the lowest recorded since 2021. Inflation peaked at a 40-year high of 11.1% in October 2022.

The rate remains above the 2% rate targeted by the Bank of England. However, the fall has encouraged hopes that the bank will start to reverse the series of interest rate increases it imposed to tackle the surge inflation.

The bank raised its base rate 14 times, from 0.1% in December 2021, to 5.25% in August. It has held the rate since then.

Addleshaw Goddard said the business monitor survey sampled almost 400 firms in February from across the Scottish economy.