Produced in partnership with the University of Strathclyde’s Fraser of Allander Institute, the report revealed that only 7% of firms are expecting strong growth during the next 12 months, while one in five businesses expect to reduce operations this year due to the increase in energy prices.

Businesses in all sectors reported positive net balances for the volume of business for the third consecutive quarter, and all core business indicators barring export activity remained optimistic throughout 2021.

However, the ongoing impact of Covid, difficulty in attracting and retaining staff, and the prices of inputs are the other main concerns, while inflationary pressures see 80% of firms expecting the prices of their goods and services to increase more than normal in the year ahead.

More than half of Scottish businesses are finding it difficult to source the goods and services they require, and more than 80% are struggling to recruit the staff they need.

Almost a quarter of businesses are also finding it difficult or very difficult to retain their own people. More than 400 businesses responded to the latest survey in December and January, from across the Scottish economy. The survey examined business sentiment in the fourth quarter of 2021 and the outlook and expectations for the coming months.

Sustainability and meeting the net-zero challenge is still on the agenda post COP26, with the majority of businesses remaining committed to achieving net zero. However, the high costs associated with sustainable practices are a barrier to the transition according to 91% of respondents, with 84% also highlighting the need to prioritise covid recovery and two-thirds identifying a lack of government funding.

The report also found that  7% of businesses expected strong or very strong growth in the coming 12 months, compared to 10% in the last quarter, and 17% in quarter 2 of 2021.

While 1 in 3 firms expected moderate growth, with the share of firms expecting weak or very weak growth rising from 40% in quarter 3 to 48% in the latest quarter.

Both the construction and transport & storage sectors had the highest share of businesses expecting increased prices in the next 12 months (91%), followed by manufacturing (88%) and wholesale and retail (84%).

At the same time, only 8% of businesses reported that they were finding it easy to source available goods and services.

Two in every three firms in the manufacturing sector reported that they were finding it difficult or very difficult to source available goods and services. More than half of responding businesses in the accommodation and food (50%), construction (54%), professional, scientific and technical (59%) and the wholesale & retail sector (55%) also reported difficulties.

In relation to net-zero ambitions, around 1 in 3 businesses reported that are considering decarbonising their energy supply, encouraging sustainable transport measures, requiring suppliers to meet sustainable objectives, and using sustainable materials.

Most sectors continued to report a positive net balance for the third consecutive quarter, with only admin & support services experiencing no change in the net balance of firms experiencing an increase in the volume of business.

Just 1 in 3 businesses reported higher volumes of business in the IT & comms sector, with high shares of business in the retail and wholesale (39%) and transport & storage (25%) also experiencing higher net balances.

Mairi Spowage, director of the Fraser of Allander Institute, said: “These results show us that despite the reintroduction of some restrictions over the Christmas period, business optimism remained throughout the final quarter of 2021.

“However, inflationary pressures and rising energy prices are a concern for firms. Growing uncertainty throughout global supply chains is also causing problems for businesses across all sectors, particularly those in industries such as manufacturing.

“Difficulties for firms in hiring new staff also persist, with some firms expressing challenges in their ability to retain existing staff levels. However, it is positive to see the lasting effects that COP26 has had on business attitudes, with the majority continuing to signal their commitment to reaching their net-zero targets.

“Businesses continue to see the opportunities and rise to the challenges of incorporating more sustainable practises, with more firms now putting the onus on suppliers to meet sustainable requirements.”

David Kirchin, head of Scotland at Addleshaw Goddard, added: “As we gradually move away from the major restraints brought on by the pandemic, these latest results show that Scottish firms expect business volume to increase. However, they also see challenges ahead, whether linked to rising energy prices, supply chain challenges or the hiring and retention of people.

“We know from our clients and contacts across all sectors of the Scottish economy that many businesses are seeing opportunity within the drive to do things differently. The past two years have seen an acceleration in disruption and the practical innovation and imagination it breeds, with tech on the rise in all sectors and intellectual property becoming ever more important and in need of protection.

“One thing that is also clear from the results of the Business Monitor is that continuity of supply of goods and services is vital and the sustainability of supply chains, their resilience and flexibility, is key – to achieve this businesses will be well service to have a crystal clear picture of the commercial arrangements in place with their suppliers.

“Similarly, the ‘war on talent’ shows no sign of ending. Businesses continue to deal with inflationary pressures on salary costs while having to focus on making themselves places where people want to spend their working time. Employees are now weighing up work/life balance, diversity & inclusion, and environmental, social and governance issues. All employers are having to ask themselves just how they continue to build an inclusive and sustainable culture.”