Business sentiment in Scotland has entered negative territory for the first time since the end of 2020.
This is according to the latest Addleshaw Goddard Scottish Business Monitor , produced with the University of Strathclyde's Fraser of Allander Institute, which showed that 70% of businesses expect growth in the Scottish economy to be weak or very weak over the coming year.
The report surveyed 450 firms in October from across the economy and showed that energy bills and staff remuneration are expected to be biggest cost drivers over the next two quarters.
Businesses also called for government support through a range of measures such as VAT cuts, a Corporation Tax cut and changes to Business Rates to help them deal with the challenges they face as the country heads for a possible recession.
When asked what they would like to see in the UK Government’s upcoming Medium-term Fiscal Plan and/or the Scottish Government’s upcoming Budget, more than a quarter of respondents mentioned VAT and/or corporation tax cuts, while other support was mentioned by 22% of businesses.
With stability also referenced by 7% of those who responded, it is clear that businesses are looking for both governments to strike the balance between offering the right package of support for businesses and retaining credibility.
Alan Shanks, partner in the energy and utilities team at Addleshaw Goddard, said: "The results of the latest survey are no surprise, given the trends of preceding reports and the recent economic turmoil hitting the global, UK and Scottish economies.
"The businesses responding to our survey have made it clear what governments can do to help them chart a course through another difficult period - they have also made it clear that they will take control of what is in their own hands, and it is positive to see an increase in the number of businesses looking to tackle their own energy costs by, among other things, looking at efficiencies and ways of generating at least part of their own power needs."
The report revealed that just under half of Scottish firms surveyed expect to reduce their operations this year due to higher energy bills; up from 40% last quarter.
However, the survey also indicated that a growing number of businesses are looking to tackle their own energy costs, with 60% increasing their focus on adopting energy-efficient processes.
In terms of overall business costs, 90% of firms in Scotland surveyed have experienced higher business costs over the past year, with the majority (77%) experiencing increased costs of up to 50%.
In the hospitality sector, 10% of firms have seen their costs more than double in a year.
Businesses will continue to pass increased costs on to their consumers, with 85% of responding businesses reporting that they expect their prices to increase by more than normal, or a lot more than normal, in the next 12 months.
The share of Scottish firms experiencing supply chain issues continues to fall, which may ease some inflationary pressures.
The survey also showed that the labour market might be beginning to cool, with the proportion of businesses with vacancies dropping from 56% to 50%.
However, 90% of those are struggling to hire the staff they need, predominantly due to a lack of skills, applications, and, increasingly, wage expectations.
The report showed positive net balances in expectations for the level of employment and turnover in the coming six months, although there continued to be negative net balances for expected capital investment and export activity.
Only the manufacturing sector experienced an improvement in business volume in the latest quarter.
Of those firms with an increased focus on energy efficiency, the majority plan to revise their energy processes (34%). This was followed by those that plan to invest in solar panelling (17%), invest in draught-proofing and double or triple glazed windows (15%) or invest in green heating technologies (8%).
Compared to the previous quarter, firms are finding it more challenging to retain their current workforce, with over a third of firms reporting difficulties retaining existing staff.
Professor Mairi Spowage, director of the Fraser of Allander Institute, said: "With the price of goods, energy, and borrowing on the rise, the majority of Scottish firms that we surveyed are expecting to wind down their operations or pass on costs to their consumers over the next year.
"However, there is some good news from our latest survey - supply chain issues continue to ease, which may dampen inflationary pressures, and the ongoing energy crisis has motivated Scottish businesses to consider making energy-efficient improvements to their processes."
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