The findings come as business sentiment drops slightly from a relative high in the Spring report, with most businesses experiencing a contraction in sales, turnover, investment, and export activity in Q2 of this year – only employment figures increased on Q1.

Produced in partnership with the University of Strathclyde’s Fraser of Allander Institute, the report on the second quarter of 2023 surveyed 400 firms from across the economy in July and August.

One of the starkest findings of the Q2 SBM is that around 40% of surveyed firms reported cancelling or delaying investments - primarily physical assets - over the past year. The most common reasons for these cancellations and delays have been economic uncertainty, affordability, and the cost of borrowing. Half of the firms that have cancelled/delayed investments are either unsure when they plan on making these investments, or are planning them for 2025 onwards.

Coming on the heels of the findings of the report on 25 years of the SBM, published in March this year, which found that low levels of investment have been a longstanding feature of the Scottish economy for many years, the performance of capital investment is a major concern.

National statistics show that business investment rates in Scotland are already lower than the UK overall and as a key driver of productivity and economic growth, continued poor performance affects the longer-term outlook of the economy

Meanwhile, costs remain a significant issue for businesses, as they are for consumers. The report showed that 83% of firms in Scotland have seen their costs increase, with 71% experiencing increased costs of up to 50%.

Two-thirds of firms with increasing costs have avoided passing them on to their consumers, with construction, wholesale and retail, and manufacturing sectors absorbing the greatest proportion of rising costs. However, half of surveyed businesses are either unable to absorb costs for any longer or are unsure how much longer they can absorb costs, though with the exception of wages, Scottish firms expect cost pressures to lessen in the second half of 2023.

Other key findings include:

• Despite business sentiment remaining positive overall, the share of firms expecting weak or very weak growth in the Scottish economy has increased from 62% to 71%.
• Inflationary pressures show continued signs of easing. The proportion of firms that expect to increase their prices by more than, or a lot more than normal, over the next 12 months dropped to 62% from 69% in 2023 Q1 and has been falling gradually from 88% in 2022 Q1.
• Supply chain issues appear to be improving for businesses in Scotland, with freight costs and availability and delays, lack of international supply, and administrative burden in trading with the EU all easing since last quarter.
• Labour supply issues persist, with 84% of firms with vacancies finding it difficult or very difficult to fill them which is slightly higher than last quarter. At the same time, a quarter of businesses report difficulties in retaining current staff - 3 percentage points higher than last quarter.
• Most businesses expect economic/ business uncertainty (83%), staff availability (77%), and political uncertainty (69%) to be important or very important over the next three months. The cost of energy (82%) and price of inputs (82%) are the biggest cost concerns for businesses.
• Just over half (52%) of firms reported energy bills as their key cost driver over the past three months (down from 65% last quarter) and 42% of firms expect energy costs to continue to be a key cost pressure in the coming six months (down from 54% last quarter). Total employee costs and wages have remained the most common cost pressure for businesses both in the previous three months and in the coming six months.

David Anderson, partner and head of corporate at Addleshaw Goddard in Scotland, said: “The Scottish business community, like most of the UK, has not had the smoothest ride in recent years and as such it’s more important than ever to regularly take its pulse and consider its take on the big issues affecting it – the pros and the cons. That is what our partnership with the Fraser of Allander Institute on the Scottish Business Monitor is all about.

“My colleagues and I work with businesses across all sectors and the latest findings chime with what we are hearing on the ground, both in terms of the challenges and some positive signs such as inflationary pressures easing and supply chain issues improving. It is clear there is still some way to go before we can return to sustained growth and the policymakers have a big role to play in the coming months.”

Professor Mairi Spowage, director of the Fraser of Allander Institute, added: “Despite the economy performing better than we expected last year, growth over the next few years is forecast to be fairly muted which is reflected in our latest business survey.”

“Although inflationary pressures, particularly energy costs, continue to ease, a significant share of firms are putting off investments while they cope with a challenging economic landscape. This is particularly concerning when we look forward to the recovery and longer-term prosperity of the Scottish economy.”