Produced in partnership with the University of Strathclyde’s Fraser of Allander Institute, the 100th edition of the report - which was first carried out in 1998 - surveyed 400 firms from across the economy and found the net balance of all core business activity indicators the final quarter of 2022 were negative, for the first time since early 2021.

However, on average firms are slightly more optimistic about their expected volume of business over the next six months, while there were also positive net balances in expectations for the level of employment and turnover in the coming six months. There continues to be a negative net balance for expected capital investment and export activity and 75% of businesses expect growth in the Scottish economy to be weak or very weak over the coming year.

Around 90% of businesses have seen their costs increase over the past year, many by more than 50%, and the price of energy continues to have a significant impact on activity, with almost half of the businesses expecting to reduce their operations this year due to higher energy bills.

Businesses are increasingly taking their own steps to tackle this issue, with more than 60% of firms reporting that the energy crisis has encouraged them to speed up making energy-efficient improvements to their business. However, a similar percentage say that price is a barrier to making these improvements – with smaller firms experiencing greater barriers than larger firms.

Notably, over the next six months total employee costs are expected to overtake energy and input costs as the biggest cost driver.

The previous report had seen businesses call for a package of support from governments to bring stability, however the support that was forthcoming did not have a huge impact on business confidence. Policy uncertainly continues to be a concern for 77% of respondents, with just 5% of businesses feeling more confident about the outlook for their business following the Scottish Budget, and only 12% feeling more confident after the UK government’s Autumn Statement.

The share of firms reporting that the price of goods and services was causing supply chain issues has fallen from 71% last quarter to 41% in Q4 2022, indicating that many firms have potentially adjusted to the higher level of prices in the market, found cheaper suppliers, or perhaps find other issues more pertinent.

Alan Shanks, head of Scotland at Addleshaw Goddard, said: “Scottish businesses are resilient and it is reassuring to see that overall sentiment has returned to the black as we get into 2023. However, no one can be under any illusions about the continuing impact of the ‘cost of doing business crisis’ and the barriers to growth in individual sectors as well as the overall economy.

“The value of the Scottish Business Monitor is to take the pulse of businesses across the economy, in good times and difficult times, and then look at what can be done to improve the situation. Whether it is policy levers or actions that businesses can take for themselves, both require ingenuity and support, financial and otherwise, to make an impact.

Mr Shanks continued: “With financial support set to be reduced for many businesses through the new Energy Bill Discount Scheme, the trend in firms taking their own steps to tackle the energy costs issue, for example, is something we are seeing within businesses we advise and it can bring long-term efficiencies, certainty and financial benefit.

“While the findings of some of the recent Scottish Business Monitors have made tough reading, it is crucial to know what is front of mind for those at the sharp end of running businesses. That’s why we have partnered with Fraser of Allander to carry out these surveys and it is remarkable achievement for the Institute to mark 25 years and 100 editions of the report.”

Professor Mairi Spowage, director of the Fraser of Allander Institute, said: “Although business sentiment is up on last quarter, 2023 will inevitably be a tough year for Scottish firms, particularly when government support is rolled back come April.

“Despite relative optimism among businesses this quarter, it is clear from our latest survey that firms feel let down by government and feel that they require further support to get them through the year.

“Our latest Scottish Business Monitor marks our 100th survey of Scottish firms since 1998, and the Institute would like to thank every business that has taken the time to respond to our monitor over the past 25 years, as it is their input that gives us insight into what is happening on the ground across a range of industries in the Scottish economy.”

Other key findings include:

• The net balance of firms reporting an increase in their volume of business activity, volume of new business activity, value of business activity, level of employment, level of capital investment, and export activity are all negative for the first time since Q1 2021.
• The majority of sectors reported a negative net balance for the volume of business in the fourth quarter of 2022, with construction, manufacturing, and hospitality hardest hit.
• Over 25% of manufacturing and 40% of hospitality and construction firms have seen their costs increase by more than 50% over the past year, with 5% of manufacturing firms seeing their costs more than double.
• The share of firms expecting to reduce operations by a large extent due to higher energy bills is up from 4% last quarter to 7% this quarter. There were improvements in the hospitality sector, where 68% of firms expect to reduce operations due to higher energy costs, down from 75%.
• More than 80% of large firms (250+ employees) said that the current crisis had increased their energy efficiency focus, compared to 51% of the smallest (1-10 employees) businesses. And almost all large firms (97%) agreed that sustainability is important to their business strategy, compared to 59% of small firms.
• The share of businesses reporting that they had vacancies dropped below 50% and firms are also finding it slightly less challenging to retain their current workforce, with just over a quarter of firms reporting difficulties retaining existing staff. Filling vacancies remains a challenge, with 80% of firms reporting applicants to lack the skills required for the job.
• The share of Scottish firms experiencing difficulties with their supply chain issues rose slightly, with a lack of UK supply the most common factor affecting firms’ ability to source goods and services.
• Inflationary pressures have begun to ease slightly, with 81% of firms expecting to increase their prices by more than, or a lot more than normal, over the next 12 months, down from 85% last quarter. However, 95% of accommodation and food services firms expect their prices to increase, followed by 93% of firms in the wholesale and retail sector - both up 3% on the last quarter.