SCOTTISH companies are taking “heavy hits” to profit margins and cash flow amid a cost-of-doing-business “crisis” which is dampening investment and undermining economic recovery, a leading business organisation has warned.
Scottish Chambers of Commerce’s latest survey, which is published today and highlights acute skills and labour shortages, shows 77 per cent of Scottish businesses expect to raise their prices over the coming three months as they battle with surging costs. This is up from 70% in the previous quarterly survey.
Commenting on the findings of the survey, conducted in partnership with the University of Strathclyde’s Fraser of Allander Institute, Scottish Chambers president Stephen Leckie declared: “Cash flow and profit margins are taking heavy hits as cost burdens rise and businesses adjust to manage spiralling costs. As government loan repayments kick in and business insurances increase, firms are dealing with a whammy of surging cost burdens.”
The sectors in which the proportions of firms reporting an intention to increase prices have risen most since the previous survey are financial and business services, and tourism.
Concerns over inflation were reported by 97% of Scottish businesses in the second quarter, exceeding the record which had been set in the previous survey.
Scottish Chambers observed that “decisions on investment have been held back, with 50% of all firms reporting no changes to levels of investment in the next quarter”.
Its survey shows that the construction, retail and tourism sectors have reported significant cuts to investment over the last quarter.
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Half of Scottish firms now report difficulties in hiring staff. Recruitment difficulties have intensified significantly in the latest quarter, from an already-elevated level.
The sectors which saw the largest increases in recruitment difficulties during the second quarter were financial and business services, manufacturing and retail.
In the latest survey, 55% of manufacturers report recruitment difficulties, up by 14 percentage points on the previous quarter. The proportion of retail and wholesale firms reporting troubles in hiring staff increased to 57% in the second quarter, the highest recorded in the past five years.
A record 54% of financial and business services firms report recruitment difficulties in the latest survey, up by 12 percentage points on the preceding quarter.
On a more positive note, the Scottish manufacturing sector signalled a rise in overall profit levels over the second quarter. This follows indications of decline in each of the two preceding quarters.
And the financial and business services sector has reported positive sales trends for a third successive quarter. This advance has been driven by domestic business, with export sales having seen little change in the past year.
Scottish Chambers reports that all contract and sales balances in the Scottish construction sector “remain consistently positive and robust, with the exception of domestic/housebuilding contracts which saw a fall on balance”.
However, a net 44% of firms in the Scottish retail and wholesale sector report declines in cash flow and profit levels for the second quarter, subtracting the proportions achieving rises from those experiencing falls.
And, overall, Scotland’s tourism sector is reporting a third consecutive quarterly fall in cash flow and profit levels.
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Eight out of 10 Scottish tourism businesses report static or lower levels of confidence. The latest survey shows a balance of 22% of firms in the sector reporting a decline in confidence, in stark contrast to the net 14% declaring an increase in optimism in the same quarter of last year.
In retail and wholesale, a balance of 40% of firms report a decline in confidence.
Mr Leckie said: “The latest Scottish Chambers of Commerce business survey reveals that cost and inflationary pressures are deterring investment and [leaving] businesses with little choice but to make difficult decisions for business survivability. These include holding back or in some cases pulling back investment, putting projects on hold due to supply-chain disruption, and in extreme situations considering whether or not to have the heating and lights on.”
He declared that “urgent action is needed now” from the Scottish and UK governments “if we are to reverse the tide of economic decline, restore confidence and put the economy back on the road to growth”.
Annual UK consumer prices index inflation had by May surged to 9.1%, its highest since 1982.
Mr Leckie said: “A record number of firms indicate that they expect to raise their prices to remain viable. With consumer discretionary spending suppressed due to the cost-of-living crisis and continuing supply-chain disruption, this trend will continue unless support is forthcoming.”
He added: “Firms are also telling us that this crisis is leading them to pull back or withhold investment decisions.
“The construction, retail and tourism sectors have reported significant cuts to investment over the last quarter, contributing to a slowdown in economic activity and any meaningful prospects for recovery.”
Mairi Spowage, director of Fraser of Allander, said: “This survey highlights concerns that businesses have about rising costs. Current data suggests that the experience of input-price rises for businesses is running at 22% – still more than double the consumer inflation rate.
“This may mean that these cost pressures may continue to feed through to prices experienced by consumers as more businesses face difficult choices. Given this environment, it is not surprising in this latest set of results that we have seen a dip in confidence across sectors. Still though, it is heartening to see that most are optimistic about sales going forward.”
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