This trend accompanies a general downturn in business activities, as more companies report a decline rather than an increase in operations. Despite these challenges, there is an optimistic outlook for the next six months, with expectations of activity growth.

Produced in partnership with the University of Strathclyde’s Fraser of Allander Institute, the report on the third quarter of 2023 surveyed 323 firms from across the economy in September and October.

While affordability and economic uncertainty have decreased as factors affecting investment plans, at the same time the influence of government policy decisions has increased as a factor in business decision making going from 30% of firms surveyed to 36%. This news comes shortly after the Scottish Government unveiled weak growth figures for the third quarter of the year, with growth of 0.4% seeing the country avoid falling into recession.

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, the latest survey found that 42% of firms are likely, or very likely, to engage in business investment over the next 12 months. Interestingly, to fund new investment 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 using private equity.

Other key findings include:

• 2 in 3 firms have experienced increasing costs over the quarter, with workforce costs continuing to be the largest cost pressure. Energy costs have eased slightly over the quarter, although it remains a concern for the vast majority of businesses, with half expecting energy costs to increase over the next six months.
• Labour supply challenges persist, with firms continuing to find it difficult to fill vacancies, while a quarter of businesses report difficulties in retaining current staff. 71% of businesses are more concerned than normal about staff retention.
• The number of firms expecting the cost of credit to increase has come down - 38% this quarter compared to 50% last quarter.
• Most businesses expect economic/ business uncertainty (84%), staff availability (79%), and political uncertainty (74%) to be important or very important over the next three months - similar to the levels reported last quarter.
• The easing in supply chain issues appears to be continuing, with 24% of firms finding it difficult or very difficult to source goods and services, well down from the 2021 Q4 peak of 52%.

Mairi Spowage

Professor Mairi Spowage, director of the Fraser of Allander Institute, said: “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.

“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.”

Laura Falls, partner in the Corporate team at Addleshaw Goddard in Scotland, said: “The statistics relating to businesses investment decisions are pretty stark, especially when looked at in light of the fact that low levels of investment have previously been highlighted as a factor in the Scottish economy’s relatively low levels of productivity and economic growth.

“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.

“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.”