Q1: Scotland remains the most confident part of the UK, but business sentiment has eased amid growing headwinds.
The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions, and company sizes, ensuring a representative picture of the UK economy. The latest quarterly findings are based on the period 10 February to 27 March 2025.
- Confidence eased marginally in Q1 2025, but Scotland remains the most optimistic part of the UK, with the Index sitting at +10.4, above the UK average (-3.0) and its historical average (+6.4).
- Despite relatively strong confidence, Scottish companies reported mediocre domestic sales and exports growth. Both are expected to improve over the year ahead, with projected growth above the historical averages.
- However, companies also reported above-average input price inflation in the year to Q1 2025 and the softest rise in selling price inflation, causing profits to decline over the past 12 months.
- The tax burden was again the most widespread rising challenge in Scotland after reaching unprecedented levels, followed by regulatory requirements which are a more widespread issue in Scotland than elsewhere in the UK.
- Capital investment growth in Scotland was the weakest in the UK over the past 12 months, while businesses decreased their R&D budgets. However, both are expected to improve significantly over the coming year.
Business confidence in Scotland
Sentiment in Scotland eased for the third consecutive quarter in Q1 2025 as the Business Confidence Index dropped from +13.1 in Q4 2024 to +10.4. However, the fall is modest in comparison to elsewhere in the UK and means that Scotland has maintained its position as the most confident part of the UK. Scotland’s index remains above its historical average of +6.3, with a score also significantly ahead of the UK average, which slipped into negative territory to -3.0 in Q1 2025.
The relative optimism in Scotland is likely linked to news that the economy is estimated to have slightly outperformed the UK in 2024, with Scottish GDP growing by 1.1% compared to 0.9% for the UK. Sector differences will also play a part, as confidence in the Energy, Water & Mining sector rose in Q1 2025, with a large pipeline of new projects related to the green energy transition in planning. However, the Scottish Retail Consortium reported muted sales results for the period 2 February to 1 March, and with April’s tax rises and the introduction of new US tariffs on Scottish exports, confidence among Scottish businesses is likely to be fragile.
Domestic sales and exports growth
Scottish companies reported annual domestic sales growth of 2.2% in Q1 2025, notably below the national average of 3.4%. Businesses in Scotland expect domestic sales will improve to 3.3% over the next 12 months, likely reflecting a predicted uplift in Construction activity and new Energy, Water & Mining projects, although the expected growth is lower than projected for the UK and all regions and nations apart from Wales (2.6%).
Alongside the relatively weak domestic sales growth, Scotland was the only UK region to report a decline in exports in the year to Q1 2025, dropping by 0.3%. Still, Scottish companies are optimistic about the year ahead and foresee exports growth of 5.3%, significantly above the historical average (3.0%) and outperforming all other regions over the next year. However, US tariffs pose a significant downside risk to the outlook for businesses.
Business challenges
Following the announcements in the UK autumn Budget, Scottish companies have become increasingly concerned about the tax burden. After reaching a survey record high in the previous quarter, the proportion of companies citing the tax burden as a rising challenge climbed further in Q1 2025 to a new historical high of 65%. This is over three times the historical average and more widespread than in any other region.
Despite the UK Government’s commitment to reduce the regulatory burden on businesses, there was a rise in the proportion of Scottish companies citing regulatory requirements as a growing challenge in Q1 2025. This level of concern is above the Scottish historical average and is a more prevalent challenge among businesses here than in any other part of the UK. Some of this rise can likely be attributed to the comparatively large presence of the highly regulated Energy, Water & Mining and Banking, Finance & Insurance sectors in Scotland.
Labour market
Scottish companies reported that annual employment growth slowed significantly in Q1 2025, to just 0.2%. The increase is only ahead of the East Midlands, where employment levels remained unchanged from the previous quarter. However, businesses in Scotland plan to lift their recruitment activity over the next 12 months, with employment growth expected to rise to 1.2%, matching the historical average. However, Scotland is projected to fall short of the employment increase forecast nationally (1.5%).
The relatively subdued employment growth is reflected in the proportion of companies citing the availability of skills in Scotland as a growing challenge. The availability of management (18%) and non-management skills (24%) both increased from the previous quarter. These concerns have climbed above their respective historical averages and are more widespread challenges in Scotland than elsewhere in the UK.
The rising cost of labour is another factor impacting employment growth in Scotland. Businesses reported wages rose by 3.4% in the year to Q1 2025, outpacing the national average of 3.1%. Scottish companies anticipate that salary growth will soften slightly over the coming year, however, the projected expansion of 2.9% is still above the historical average (2.2%) and matches the UK growth projection.
Input and selling prices, and profits growth
Inflation remains a key challenge for Scottish businesses, and they reported annual input price inflation of 4.0%. This rate is only marginally ahead of the national average (3.9%) but remains significantly above the region’s historical average of 2.6%. Over the coming year, businesses expect input cost inflation will moderate significantly to 2.3%, the lowest of any part of the UK.
As input price inflation has softened, Scottish companies have slowed the rate at which they increased their selling prices to 1.4% in the 12 months to Q1 2025. This rate is marginally below the historical average (1.5%) and the lowest in the UK. This comparatively modest selling price growth is at least partially linked to the relatively low-price increases recorded by Energy, Water & Mining companies due to their large concentration of the sector in Scotland. Scottish companies plan to lift the rate they increase their prices in the coming year to 2.5%, and above the national average (2.1%).
Subdued domestic and export sales growth alongside increased salary growth and high input price inflation have eroded the profit margins of companies in Scotland. A marginal decline in annual profits growth of 0.2% was reported by businesses in Q1 2025. Looking ahead, strong exports growth expectations and softening input price inflation underpin company predictions that profits growth will rise to 3.9%, above Scotland’s historical average (3.4%). However, even with this improvement, Scotland is projected to be among the weakest parts of the UK, only outperforming the South West (3.2%) and Wales (3.1%).
Investment
Businesses reported that the investment environment in Scotland was subdued at the start of the year. Companies reduced their capital investment expenditure growth significantly in the year to Q1 2025 to just 0.7%. This is the weakest expansion of any part of the UK, lagging significantly behind the UK average of 2.6%. However, Scottish companies plan to increase investment growth to 2.0% over the next 12 months, surpassing the national projection of 1.8% and broadly in line with Scotland’s historical average of 2.1%
Meanwhile, R&D budgets in Scotland declined by 0.3% in the 12 months Q1 2025. Scottish companies plan to raise budgets in the year ahead to 1.8%, a stronger uplift than expected in the UK (1.5%) but lagging the Scottish historical average (2.0%).