Political uncertainty ‘weighing heavily’ on decision-making, warns Fraser of Allander

Cost pressures remain the dominant concern for firms north of the Border, according to the Fraser of Allander Institute’s latest Scottish Business Monitor. All six headline indicators in the quarterly survey - which tracks business sentiment from more than 250 firms across all 32 Scottish local authorities - remained in negative territory for a fifth consecutive quarter.

Economists warned that the degree of persistence had rarely been seen in a report that dates back to 1998, and suggests that pessimism is becoming “entrenched rather than transitory”.

The Fraser of Allander monitor follows a number of recent surveys that paint a picture of contrasting fortunes for Scotland’s business community.

Last week’s Red Flag Alert data from business recovery specialist Begbies Traynor revealed that business distress cases had rocketed in the closing months of 2025. It showed the most serious “critical” instances of distress rose by 49.5 per cent year on year in the fourth quarter to 3,517, ahead of the UK average increase of 43.8 per cent.

January’s regional growth tracker from Royal Bank of Scotland revealed that Scottish companies had suffered further declines in output and new orders as inflation continued to bite. However, staffing levels were found to be stabilising and businesses “remain hopeful that 2026 will be a year of growth”.

Meanwhile, a separate survey last week suggested that Scotland’s small businesses have seen a rebound in their fortunes following 18 months of sharp declines.

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Fraser of Allander noted that during the final three months of 2025, more businesses reported a decline in employment levels, aligning with official data showing nearly 15,000 fewer employees on Scottish business payrolls in November 2025 compared with a year earlier. Firms also reported weaker turnover during the period, including through the traditionally strong “golden quarter” in the run up to Christmas.

Nearly 80 per cent of the firms polled reported higher total costs in recent months, while around 90 per cent expect costs to rise further over the first half of 2026. Despite easing input and energy price pressures, businesses continue to face rising wage and employee costs.

Looking ahead, the survey highlights continued weakness in both new capital investment and export activity. While access to credit is not viewed as a major constraint, economic and political uncertainty is said to be weighing heavily on decision-making.

João Sousa, deputy director at the Fraser of Allander Institute, which is part of the University of Strathclyde, said: “As political parties set out their economic priorities, the Scottish Business Monitor provides a timely snapshot of the conditions firms are experiencing on the ground. Persistent cost pressures, weak investment and heightened uncertainty underline the importance of policy clarity and stability if confidence is to recover.”

Almost half of surveyed businesses reported using artificial intelligence (AI) in some capacity by the end of 2025, with adoption extending beyond services into construction, manufacturing and production.

Red flags which expose a critical vulnerability in Scotland’s economy