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Inflation challenges rising for Scottish firms

Scottish businesses have positive expectations for activity levels, employment and turnover, but also report that inflationary pressure and supply chain issues pose challenges in the year ahead.

The latest Addleshaw Goddard Scottish Business Monitorwhich surveyed 500 firms in April, revealed that all sectors of the Scottish economy recorded large net balances for their volume of business in the first quarter of 2022 – with this positivity expected to continue over the next six months.

Overall business sentiment remained positive, with all core indicators – except export activity – remaining optimistic. The rise in business volumes was matched in expectations for the levels of both employment and turnover in the coming six months.

However, the report also illustrated that the growing impact of inflationary pressure and supply chain issues is expected to have a marked effect on businesses, with more than a third expecting to reduce operations due to higher energy prices, up from a fifth in the last three months of 2021.

Businesses in the wholesale and retail (48%) and transport and storage (47%) sectors had the highest share of firms expecting to reduce operations due to energy prices.

The most common concerns among businesses for the rest of 2022 are the costs of energy (91%), the price of inputs (86%), the availability of inputs (81%) and new staff (81%).

More than half of all businesses are finding it difficult to source goods and services. The transport and storage sector had the highest share of businesses reporting difficulties (77%), followed by two in three firms in the accommodation and food services sector.

And almost 90% of businesses expect their prices to increase more than normal over the next year, including every single accommodation and food service firm surveyed.

Staffing remains a source of concern for businesses, with both the cost and availability of employees providing a challenge. Across the Scottish economy, a lack of required skills and experience was the most commonly reported factor making filling vacancies difficult (76%), followed by a lack of applications (69%) and wage expectations (56%).

The report, produced in partnership with the University of Strathclyde’s Fraser of Allander Institute, lack of supply in the UK and the price of goods and services were the most common factors causing supply chain difficulties, with only 7% of businesses finding it easy to source goods and services.

The main cost drivers for firms over the coming six months are expected to come from rising energy prices and total employee costs.

It also found that 95% of firms in the constructions sector expect their prices to increase, followed by 90% of firms in the professional, scientific and technical sector.

Of the firms reporting they currently had vacancies to fill, 84% reported they were finding them difficult or very difficult to fill, while one in four firms are finding it difficult or very difficult to retain current staff.

Mairi Spowage, director of the Fraser of Allander Institute, said: “Businesses continued to be optimistic in the first quarter of the year despite increasing concerns about inflation and supply chain pressures.

“However, there has been an increase in the number of firms that expect to reduce operations this year due to higher energy bills, with businesses in the retail and transport sectors particularly impacted by the ongoing hikes in energy prices.

“Due to global supply chain issues, Scottish businesses are also finding it hard to source the goods and services that they need and firms are facing higher prices for their inputs.

“Attracting and retaining talent remain key challenges for Scottish firms, particularly those in hospitality, as skills mismatches continue to make it difficult to fill vacancies.”

Suzanne Moir, partner at Addleshaw Goddard, said: “Businesses are adapting despite a combination of challenges, demonstrating both the resilience and innovation of these businesses.

“However, the impact of rising prices, particularly in relation to energy, can be felt in all areas of our personal and business lives.

“All sectors of the economy are also operating in a competitive market for employees, particularly as the report has identified a gap in the number of candidates with the skills and experience required.”

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