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Almost three quarters of Scottish businesses expect to put up prices in the next three months as rising labour, energy and tax costs continue to squeeze margins, according to a new survey that suggests households could face further pressure from higher prices.
The latest Quarterly Economic Indicator from the Scottish Chambers of Commerce and the Fraser of Allander Institute found that 74% of firms expect to increase prices over the coming quarter, compared with 55% at the same point last year. Just 4% expect prices to fall.
The findings come despite an improvement in business confidence, with the survey recording a positive confidence balance for the first time this year. However, revenues, cashflow and profitability all remain under pressure, highlighting the continuing challenges facing firms across Scotland.
Thirty-nine per cent of businesses reported higher confidence than in the previous quarter, while 27% reported a decline, producing a net balance of +13%, compared with -15% in the second quarter and -12% a year ago.
The survey found labour costs remain the biggest source of pressure, affecting 70% of businesses. Utility costs were cited by 56% of firms and fuel costs by 52%, while inflation and taxation emerged as the joint leading concerns among respondents.
Charandeep Singh, chief executive of the Scottish Chambers of Commerce, said the results showed the link between the cost of doing business and the cost of living.
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“These findings are a stark reminder that you cannot tackle the cost of living without tackling the cost of doing business," he said. “Rising costs have consequences far beyond individual firms, affecting jobs, investment and ultimately the prices paid by households.”
Mr Singh called on the UK government to use the forthcoming Budget to reduce employers' national insurance contributions, and urged the Scottish Government to move more quickly on reforms to the non-domestic rates system.
“Both governments have an opportunity in their forthcoming budgets to ease the cumulative cost burden on businesses, support economic growth and help contain the pressures feeding through to household bills,” he added.
While confidence has improved, the report suggests trading conditions remain difficult. The survey found that revenue continued to contract, with a net balance of -5%, while cashflow remained at -12% and profitability at -13%.
Export revenues were the only area to record growth, rising by 6%, although the report noted this was based on a smaller number of internationally active firms.
“The recent movement in business confidence may be an early sign of better things to come, but we should be careful not to mistake that for a recovery in trading conditions," said Doug Smith, vice-president of the Scottish Chambers of Commerce. "Revenues, cashflow and profitability remain under pressure, and firms have spent several years absorbing higher costs, delaying investment and reconsidering recruitment plans.
“The fact that almost three in four Scottish businesses now expect to put their prices up tells us just how limited their room for manoeuvre has become. When firms are already operating on tight margins, further increases in employment, energy, and other costs leave them with difficult decisions about what they can continue to absorb.
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The pressure was reflected in comments submitted alongside the survey: “Hospitality businesses continue to face significant pressure from VAT, business rates and energy costs," said one operator based in Edinburgh.
"Despite an annual turnover of more than £2 million, we are operating at close to break even, raising serious questions about our long-term viability.”
The report's authors said recent resilience in the Scottish economy was encouraging, but warned that sustained growth would depend on businesses having the certainty and financial capacity to invest, recruit and expand. With taxation already among the leading concerns identified by firms, they said the forthcoming UK and Scottish budgets would be an important test of whether improving confidence can be translated into stronger economic performance.