Pessimism is becoming “entrenched” among businesses as cost pressures continue to depress investment prospects and staff are laid off, according to a quarterly survey.
All six headline indicators in the Fraser of Allander Institute’s latest Scottish Business Monitor have remained in negative territory for a fifth consecutive quarter.
“This degree of persistence, rarely seen in the series dating back to 1998, suggests that pessimism is becoming entrenched rather than transitory,” it said.
The report, covering Q4 2025, finds that labour market conditions continue to soften. More businesses reported lower job levels, aligning with official data showing nearly 15,000 fewer employees on Scottish business payrolls in November compared with a year earlier.
Firms also reported weaker turnover during the period, including through the traditionally strong ‘golden quarter’.
Cost pressures remain the dominant concern: nearly 80% of firms reported higher total costs in recent months, while around 90% expect costs to rise further over the first half of 2026.
Despite easing input and energy price pressures, businesses continue to face rising wage and employee costs – a particular challenge in an economy where services account for close to 80% of output and labour costs are a key driver of inflation.
Looking ahead, the survey highlights continued weakness in both new capital investment and export activity.
The Institute notes that the productivity implications of AI, including whether it complements or substitutes for labour, will remain a key area of focus in future analysis.
João Sousa, deputy director at the Fraser of Allander Institute, said: “As political parties set out their economic priorities, the Scottish Business Monitor provides a timely snapshot of the conditions firms are experiencing on the ground.
“Persistent cost pressures, weak investment and heightened uncertainty underline the importance of policy clarity and stability if confidence is to recover.”
The Fraser of Allander Business Monitor tends to be among the gloomier surveys and it contrasts with a Bank of Scotland survey published last week which offered a more optimistic outlook. It claimed that business confidence in Scotland rose one point during January to 37%.
A net balance of 42% of businesses in the country also expected to increase staff levels over the next year, up one point on the previous month.
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