What's happening now across the Scottish business sector, compared to the 2008 financial crisis or the Covid pandemic, isn't so much a seismic shock but a rather more slow-motion convergence of multiple challenges. Persistently rising costs, unremitting skills shortages, higher taxation and global volatility have seemingly become the norm, not a passing phase.
So there's little surprise that the latest Scottish Business Monitor produced quarterly by the Fraser of Allander Institute found "little expectation of short-term relief" across the business community and suggested that "pessimism is becoming entrenched rather than transitory".
The basis for this conclusion? All six of the survey's headline indicators remained in negative territory during the final three months of 2025 for the fifth quarter in a row. Such an unusually tenacious run of weakness has rarely been recorded since the survey began in 1998.
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Heading into yet another uneasy year, cost pressures remained the dominant concern with nearly 80% of all firms across Scotland saying the expense of doing business had increased in recent months. Roughly 90% expected this trend to continue through the first half of 2026.
It was an almost identical story to that last week from ICAEW, the professional membership group for chartered accountants, whose confidence monitor in Scotland fell for the sixth quarter in a row to its lowest since 2022. In its survey, Scottish and UK firms identified the growing tax burden as their biggest challenge.
Along with an increase in the main rate of corporation tax that took effect in April 2023, the standard minimum wage rose to £10.42 from £9.50 and has since gone up to the current £12.21. From this April it will rise again to £12.71.
But probably the most onerous increase from an employer's perspective have been changes to national insurance contributions announced in the Autumn Budget of 2024 by Chancellor Rachel Reeves, which are expected to raise £25 billion for the Treasury in the coming years. The annual cost of this to Scottish businesses is projected to be somewhere in the region of £400-£600 million with lower-paid labour-intensive sectors such as hospitality, retail, social care and leisure hit hardest.
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Industry groups have said pubs, restaurants and hotels are being "taxed out of business" by the sheer scale of increases. UKHospitality claimed in September that of the 142,000 payrolled jobs lost since the changes to national insurance were announced in October 2024, roughly 90,000 had been in the accommodation and food service sectors.
It and other industry groups are also continuing to push for business rates on hospitality firms in Scotland to be brought in line with those in England to avoid further "severe" consequences. Draft revaluations of upcoming rateable values show sharp uplifts for many pubs, hotels and restaurants, with the Scottish Hospitality Group citing examples of increases of 550% or more.
The new data from Fraser of Allander also backs up last month's claims by the Scottish Retail Consortium of "little Christmas cheer" for the country's shopkeepers as the so-called "golden quarter" during the run-up to the holidays failed to sparkle.
The institute reported weaker turnover across the board in Scotland during the final three months of 2025, with the net balance of -14.6 deteriorating from -11.4 the previous quarter. This was despite an improvement in sales volumes (-8.6 versus -12.3), reflecting the toll of added cost pressures.
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João Sousa, deputy director at the Fraser of Allander Institute, noted that the next quarterly survey will be the last before the Scottish Parliament election on May 7. Latest polling suggests the SNP will remain the largest party despite a fall in support, with Reform UK in second place and Scottish Labour in third.
“As political parties set out their economic priorities, the Scottish Business Monitor provides a timely snapshot of the conditions firms are experiencing on the ground," Mr Sousa said. "Persistent cost pressures, weak investment and heightened uncertainty underline the importance of policy clarity and stability if confidence is to recover.”
From the look of things at the moment, any "recovery" in the coming months will be marginal at best but it's important to remember that economic slumps do not last forever, and recovery is often an incremental process.
The improvement in sales volumes noted by Fraser of Allander was accompanied by better new business activity. Although both remain in negative territory, each is in a considerably better place than the lows recorded in the first quarter of 2025.
The institute also highlighted the expanding use of artificial intelligence among Scottish businesses, with half reporting that they had incorporated the technology into their operations by the end of last year.
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Fraser of Allander noted the productivity potential of AI, but added that whether it complements or substitutes for human labour will be a "key area of focus in future analysis". Uptake was highest in the services sector at almost 56%, followed by manufacturing and production, and then construction on 38%.
Business sentiment improved relative to the third quarter by a net balance of 5.1 points to -7.5%. Asked about expectations for the coming 12 months, 2.6% said they anticipated "strong" or "very strong" growth, up by 1.2 points on the previous quarter.
Alas, this is where the silver lining ends as there was also a small increase in the share of firms expecting very weak growth, with that figure hovering around 35%. A few are very bullish about their prospects, but the largest majority by far anticipate subdued growth in the coming year.
There is absolutely no getting around the difficult environment that firms are operating in, and right now it's hard to see a path to the sunlit uplands. There are no easy nor quick fixes, so it's going to take concerted political effort that has long been lacking to create the conditions for meaningful recovery.
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