The latest Addleshaw Goddard Scottish Business Monitor report surveyed 500 firms in April from across the economy and found that while businesses have positive expectations for activity levels, employment and turnover, many also report that inflationary pressure and supply chain issues pose challenges in the year ahead.

The report revealed that all sectors of the Scottish economy recorded large and positive 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, produced in partnership with the University of Strathclyde’s Fraser of Allander Institute, illustrated that the growing impact of inflationary pressure and supply chain issues is expected to have a marked effect on businesses, with more than one-third expecting to reduce operations due to higher energy prices, up from one-fifth in the last three months of 2021.

Businesses in the wholesale & 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%), and 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 & storage sector had the highest share of businesses reporting difficulties (77%), followed by 2 in 3 firms in the accommodation & 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 proving 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 has also highlighted a 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.

Businesses have also indicated that the main cost drivers for firms over the coming six months are expected to come from rising energy prices and total employee costs.

At the same time, a total of 95% of firms in the construction sector expect their prices to increase, followed by 90% of firms in the professional, scientific and technical sector. Similarly, of the firms reporting they currently had vacancies to fill, 84% reported they were finding them difficult or very difficult to fill, while 1 in 4 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 over 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.

“It will be interesting to see how inflationary pressures weigh on business sentiment as the year goes on.”

Suzanne Moir, partner and specialist in Energy & Transport at Addleshaw Goddard, added: “The overall positivity shown in this report is good news and reflects what we are seeing and hearing from our own clients and contacts in all sectors of the Scottish economy. 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. The consequences of these price rises are already being felt, however one byproduct will undoubtedly be an acceleration of the energy transition. All businesses, not only those operating in the energy sector, are being driven to seek new ways to generate power and reduce their energy consumption both to combat rising prices and play their part in the move to net zero.

“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. Salary is one aspect of the equation, as is supporting people to be the best they can be in a flexible, collaborative environment, with interesting work. That can be a real differentiator along with fair remuneration and providing that balance to attract and retain the right people is a challenge that all businesses face.”