The ICAEW’s latest business confidence monitor for Scotland found sentiment to be in negative territory, with only Wales recording a lower reading.
Scottish companies told the accountancy network that regulatory requirements and tax, labour market and transport issues were taking their toll. Input price inflation has also hit the country’s businesses, leading to a rise in selling costs and salaries.
With firms facing a crisis from the cost of doing business, amid soaring energy bills and double-digit inflation, ICAEW said households and companies would need support in the short-term to get through the next few months.
David Bond, ICAEW director for Scotland, said: “After a strong recovery from the pandemic, Scottish business confidence is now in negative territory. Our companies are struggling with regulatory requirements, tax and labour market problems and weakening exports, and face a crisis from the cost of doing business.
“With inflation running at levels not seen for 40 years, ministers must provide targeted support for struggling businesses and households to keep the lights on this winter.”
The report found that two in five businesses were being increasingly challenged by regulatory requirements, possibly because of the importance of banking, finance and insurance within the Scottish economy.
More companies said they were being challenged by the tax burden than at any time since the business confidence monitor started. Meanwhile, the number of companies that said transport problems were a growing challenge fell from their high in the final quarter of 2021, but remained much higher than the historical average.
Input price inflation rose by 4.6 per cent year-on-year, the sharpest increase seen since late 2008. The same rise is forecast in the year to the third quarter of 2023.
However, domestic sales grew by 6.4 per cent year-on-year, in spite of the plunge in confidence, with a further 7.1 per cent rise expected - the strongest outlook of any part of the UK. Export growth was among the weakest of any part of the UK and this trend is expected to continue, the monitor noted.
Across the UK, business confidence fell into negative territory, with sentiment at -5 on the index, down from its peak of 47 a year ago, with higher costs and significant skills shortages weighing down expectations despite a strong sales performance.
There continued to be challenges from the labour market, the report also found.
The proportions of companies with problems from the availability of both management and non-management skills were double the historical averages, reflecting both the demand for labour and the departure of people from the workforce.
Businesses were responding to these challenges by increasing salaries at the fastest rate for 14 years, with a similar increase forecast for the months ahead.
There are more than 1.8 million chartered accountants and students around the world and about 186,500 of them are members and students of ICAEW, which can trace its roots back to 1880.