Business sentiment positive but energy price hike tops concerns of Scottish businesses in 2022

Business sentiment positive but energy price hike tops concerns of Scottish businesses in 2022

David Kirchin

Scottish business sentiment remained positive in the fourth quarter of 2021, but the rising cost of energy impacts prospects for 2022 and operates as a drag on the outlook for economic growth, despite the easing of pandemic restrictions. 

The results of the latest Addleshaw Goddard Scottish Business Monitor report – produced in partnership with the University of Strathclyde’s Fraser of Allander Institute – revealed that only seven per cent of firms are expecting strong growth during the next 12 months, while one in five businesses expect to reduce operations this year due to the increase in energy prices.

Businesses in all sectors reported positive net balances for the volume of business for the third consecutive quarter, and all core business indicators barring export activity remained optimistic throughout 2021.

However, the ongoing impact of Covid, difficulty in attracting and retaining staff, and the prices of inputs are the other main concerns, while inflationary pressures see 80 per cent of firms expecting the prices of their goods and services to increase more than normal in the year ahead.

More than half of Scottish businesses are finding it difficult to source the goods and services they require, and more than 80 per cent are struggling to recruit the staff they need. Almost a quarter of businesses are also finding it difficult or very difficult to retain their own people.

More than 400 businesses responded to the latest survey in December and January, from across the Scottish economy. The survey examined business sentiment in the fourth quarter of 2021 and the outlook and expectations for the coming months.

Sustainability and meeting the net-zero challenge is still on the agenda post COP26, with the majority of businesses remaining committed to achieving net-zero. However, the high costs associated with sustainable practices are a barrier to the transition according to 91 per cent of respondents, with 84 per cent also highlighting the need to prioritise covid recovery and two-thirds identifying a lack of government funding.

Other key findings include:

  • seven per cent of businesses expected strong or very strong growth in the coming 12 months, compared to 10 per cent in the last quarter, and 17 per cent in quarter two of 2021. 
  • one in three firms expected moderate growth, with the share of firms expecting weak or very weak growth rising from 40 per cent in quarter three to 48 per cent in the latest quarter.
  • Both the construction and transport & storage sectors had the highest share of businesses expecting increased prices in the next 12 months (91 per cent), followed by manufacturing (88 per cent) and wholesale and retail (84 per cent).
  • Only eight per cent of businesses reported that they were finding it easy to source available goods and services.
  • Two in every three firms in the manufacturing sector reported that they were finding it difficult or very difficult to source available goods and services. More than half of responding businesses in the accommodation and food (50 per cent), construction (54 per cent), professional, scientific and technical (59 per cent) and the wholesale & retail sector (55 per cent) also reported difficulties.
  • In relation to net-zero ambitions, around one in three businesses reported that are considering decarbonising their energy supply, encouraging sustainable transport measures, requiring suppliers to meet sustainable objectives, and using sustainable materials.
  • Most sectors continued to report a positive net balance for the third consecutive quarter, with only admin & support services experiencing no change in the net balance of firms experiencing an increase in the volume of business. 
  • one in three businesses reported higher volumes of business in the IT & comms sector, with high shares of business in the retail and wholesale (39 per cent) and transport & storage (25 per cent) also experiencing higher net balances.

Mairi Spowage, director of the Fraser of Allander Institute, said: “These results show us that despite the reintroduction of some restrictions over the Christmas period, business optimism remained throughout the final quarter of 2021.

“However, inflationary pressures and rising energy prices are a concern for firms. Growing uncertainty throughout global supply chains is also causing problems for businesses across all sectors, particularly those in industries such as manufacturing.

“Difficulties for firms in hiring new staff also persist, with some firms expressing challenges in their ability to retain existing staff levels.

“However, it is positive to see the lasting effects that COP26 has had on business attitudes, with the majority continuing to signal their commitment to reaching their net-zero targets.

“Businesses continue to see the opportunities and rise to the challenges of incorporating more sustainable practises, with more firms now putting the onus on suppliers to meet sustainable requirements.”

David Kirchin, head of Scotland at Addleshaw Goddard, said: “As we gradually move away from the major restraints brought on by the pandemic, these latest results show that Scottish firms expect business volume to increase. However, they also see challenges ahead, whether linked to rising energy prices, supply chain challenges or the hiring and retention of people.

“We know from our clients and contacts across all sectors of the Scottish economy that many businesses are seeing opportunity within the drive to do things differently. The past two years have seen an acceleration in disruption and the practical innovation and imagination it breeds, with tech on the rise in all sectors and intellectual property becoming ever more important and in need of protection.

“One thing that is also clear from the results of the Business Monitor is that continuity of supply of goods and services is vital and the sustainability of supply chains, their resilience and flexibility, is key – to achieve this businesses will be well service to have a crystal clear picture of the commercial arrangements in place with their suppliers.

“Similarly, the ‘war on talent’ shows no sign of ending. Businesses continue to deal with inflationary pressures on salary costs while having to focus on making themselves places where people want to spend their working time. Employees are now weighing up work/life balance, diversity & inclusion, and environmental, social and governance issues. All employers are having to ask themselves just how they continue to build an inclusive and sustainable culture.”

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