State of the nation: How Scottish firms are coping with cost and hiring pressures

Scotland’s private sector is “moving in the right direction” but remains in contraction territory as businesses continue to shed jobs, a key survey today reveals.

The country has moved from 12th to sixth place in terms of performance across all UK regions, according to the latest Royal Bank of Scotland (RBS) Growth Tracker. The seasonally adjusted index, which measures the month-on-month change in the combined output of the region’s manufacturing and service sectors, rose from 46.9 in December to 49.6 in January, offering “some signs of optimism” for Scotland’s business sector in 2025. A reading below 50 denotes contraction while above that level indicates expansion.

RBS said the “softer contraction” in private sector output was driven by a renewed uplift in services activity but partly offset a further decline in manufacturing production. Scottish firms continued to let workers go at the start of 2025, after December data signalled a drop in employment for the first time in almost two years. Services joined manufacturing in registering lower staffing.

Scotland’s rank out of the 12 monitored nations and regions of the UK rose to sixth place in January, according to the latest Royal Bank of Scotland Growth Tracker.

Scottish private sector businesses once again reported a decrease in new work intakes in January, with companies signalling lower client demand relating this to greater uncertainty about domestic economic conditions. The upcoming rise in employers' national insurance contributions was also stated to have led customers to clamp down on spending.

Overall input prices rose at their sharpest pace since August 2023, the report also revealed, with both services and manufacturing recording a steeper rate of inflation than in December.

Judith Cruickshank, chair of the Scotland board at Royal Bank of Scotland, said: “Scottish firms reported a leap in costs and prices at the start of 2025, just as the Bank of England raised its inflation forecast to 3.7 per cent. Pricing pressure shot back up to levels last seen in the summer of 2023, according to respondents, with energy costs and rising employment costs all playing a role. Nevertheless, businesses said it wasn’t a worsening situation for output, with Scotland’s activity score recovering.

“But uncertainty over the state of demand in future is clearly playing a role, even though firms in Scotland appear to have stronger expectations for the labour market than many other parts of the UK.”

The report highlighted fresh challenges for manufacturing production.

Scotland’s rank out of the 12 monitored nations and regions of the UK rose to sixth place in January. While the contraction in order book levels was consistent with the UK-wide trend, it was comparatively stronger north of the Border, the bank noted. Total sales across the UK fell modestly for the second month running.

The outlook for activity remained subdued in January, picking up only slightly from the previous month’s two-year low. Firms highlighted greater inflation risks due to wage cost hikes, which many feared would lead to a drop-off in sales and a weaker economic climate.

Scottish business confidence was found to be much lower than the UK trend, despite the latter slipping to the lowest level since December 2022. Anecdotal reports suggested a reduction in new orders and increased cost pressures were the main factors leading firms to streamline their workforces. However, there were some respondents that replaced staff or added extra working hours to support growth prospects.

Spare capacity across the private sector remained evident last month. Backlogs of work fell at the strongest pace for six months, albeit less marked than seen nationwide. Scottish companies mostly linked a drop in work-in-hand to lower sales.

Services companies associated higher costs with an increase in wages, as well as heightened prices for energy, fuel and technology. Goods producers typically cited an uplift in supplier charges, which in turn was often due to a mark up in payroll costs.

These upticks underscored an increase in average prices charged, as many firms commented that they had raised their prices in January. Overall charges rose markedly, with the rate of inflation quickening to a nine-month high. For input and output prices alike, inflationary pressures were slightly less marked in Scotland compared to the UK average.

Today’s Growth Tracker comes just a week after Scottish businesses were found to be increasingly pessimistic about their outlook for the remainder of the year with the upcoming national insurance hike taking its toll on confidence.

Bosses said they were worried about having to navigate a slowing economy as well as policy changes announced in both the UK and Scottish Budgets that are expected to have a “significant impact”. Despite easing headline inflation rates, more than eight in ten businesses surveyed reported higher total business operating costs in the last three months of 2024.

While borrowing costs were gradually falling, just 13 per cent of businesses indicated higher new capital investment in the last quarter of the year relative to the third quarter - which is unlikely to help longstanding concerns regarding Scotland’s productivity challenge, according to the latest business monitor from the Fraser of Allander Institute at the University of Strathclyde.

The employers’ national insurance contribution changes announced in the UK autumn Budget - and due to take effect from this April - are expected to heavily impact business planning, with seven in ten businesses stating that these changes will have a “significant” impact on their operations in 2025.

Looking ahead, three-quarters of businesses expect Scottish economic growth to remain weak or very weak in 2025. Businesses polled also indicated a strong desire for greater economic certainty, with nine in ten firms noting that economic uncertainty is the most important concern over the first three months of 2025. The findings come from a survey of more than 300 Scottish companies, conducted in December and January.

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