Q3: Scottish business confidence dips into negative territory but remains above the UK.
The latest national Business Confidence Monitor (BCM) shows that business sentiment deteriorated further into negative territory in Q3 2025. This increased pessimism is underpinned by elevated concern over the tax burden, as well as above-average inflation and weak domestic and exports sales growth eroding businesses’ profit margins.
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 14 July to 24 September 2025.
- Scotland’s business confidence score dropped to -0.5 in Q3 2025, the first negative score since Q1 2023 but companies are more upbeat than the UK average (-7.3).
- Scottish companies reported above average domestic sales and exports growth over the past year, supporting an uplift in profits. Businesses anticipate performance will improve further in the year ahead.
- Unlike the rest of the UK, regulations are the primary challenge for Scottish businesses, with the tax burden in a distant second place.
- Inflationary pressures picked up in Q3 2025 and Scottish businesses project the strongest rises in salary growth and selling prices in the UK next year.
- The investment outlook is mixed in Scotland. A recent uptick in capital investment is not expected to continue but companies plan to maintain above average R&D budget growth in the year ahead.
Business confidence in Scotland
Scottish business confidence fell for the fifth consecutive quarter in Q3 2025, dipping slightly into negative territory at -0.5 and recording a second quarter below the historical norm (+6.3). However, sentiment in Scotland remains above the UK average (-7.3) and is one of the most confident parts of the UK, only behind Wales (+0.9) and the North West (-0.4), as Scottish businesses enjoyed above average domestic sales and exports growth in the year to Q3 2025.
The pace of Scotland’s economic growth slowed sharply in Q2 2025, with Scottish GDP growing by 0.2% in Q2 2025, down from 0.4% in Q1 2025. GDP growth in the first half of 2025 has been driven by the services and construction sectors, offset by falling manufacturing output, with heightened global uncertainty and tariff changes weighing on the sector. Uncertainty is also impacting households and consumer sentiment remains weak with the Scottish Consumer Sentiment Indicator in negative territory, although it has improved from the low recorded in April this year.
Domestic sales and exports growth
Annual domestic sales growth reached 3.6% in Q3 2025, outpacing the national average and the Scottish historical norm (both 3.0%). Businesses are more optimistic about the next 12 months and expect domestic sales growth to rise to 4.2%, slightly above the UK-wide projection of 4.0%. Stronger domestic sales performance in IT & Communications and Banking, Finance & Insurance likely explain some of the sales outlook for Scotland.
Despite the challenging global trading conditions, annual exports growth picked up to 3.1% in Q3 2025, above the UK average (2.4%) and marginally ahead of the historical average (3.0%). The locally important Energy, Water & Mining sector, which reported a surge in exports activity, likely explains some of the uplift in Scotland in this quarter. Scottish companies expect exports growth to improve to 3.3% over the coming year, only marginally lower than the UK-wide forecast of 3.6%, with the optimism of the Energy, Water & Mining sector supporting the outlook.
Business challenges
Unlike other parts of the UK, the growing challenge of regulation is the greatest concern among Scottish businesses and was cited by a larger proportion of businesses (61%) than elsewhere and close to its historical high (62%). Partly this will reflect the large presence of highly regulated sectors in Scotland including Banking, Finance & Insurance and Energy, Water & Mining, but it likely also reflects growing regulatory concerns in the Property and Retail sectors. In contrast, concerns about the tax burden, though still significant at 41%, were reported by a smaller proportion of companies in Scotland than in any other part of the UK.
As domestic sales and exports growth picked up in Q3 2025, the proportion of Scottish businesses reporting customer demand (33%) and competition in the marketplace (30%) as a growing challenge remain prominent but eased compared to the previous quarter. However, nearly 2 in 5 companies reported staff turnover as a growing concern, significantly above the historical norm and more widely cited in Scotland than in any other UK region.
Labour market
Businesses reported buoyant employment growth of 2.2% in Q3 2025, the fastest rate of growth of any UK region or nation and above the historical norm (1.2%). However, this pace is not expected to be maintained, with a more modest rate of 1.4% projected for the year ahead and similar to the UK-wide expectation (1.2%).
Annual wage inflation has been easing in Scotland in recent quarters, but businesses reported an uplift in Q3 2025 to 4.1%, the highest rate in the UK. However, while businesses anticipate that the pace of salary growth will ease to 3.5% in the year ahead, this is significantly above the historical average (2.2%) and the pace expected across the wider UK (2.7%).
With elevated salary growth and staff turnover reported as a growing challenge, Scottish businesses intend to invest more in staff development in the year ahead, raising the staff budget growth to 2.9%, up from a below average 0.8% reported for the year to Q3 2025.
Input prices, selling prices and profits growth
After falling for three consecutive quarters, annual input price inflation ticked up to 4.4% in Q3 2025, outpacing all other parts of the UK apart from the East Midlands. Scottish companies anticipate a sharp slowdown in input price inflation over the coming year, to 2.4%, lower than the UK-wide forecast of 2.8% and below the Scottish historical norm (2.6%).
With growing cost pressures, selling price inflation also ticked up in Scotland to 2.3%, broadly in line with the UK average (2.2%) but above the historical norm (1.5%). Businesses foresee further rises to their selling price growth over the next 12 months to 2.4%, the strongest growth projected by any region of the UK.
Despite inflationary pressures, relatively strong sales and exports growth supported above average profits growth in the year to Q3 2025. Businesses reported profits expanded by 2.9%, above the UK average (2.3%), but slower than the Scottish historical average (3.4%). Scottish businesses expect profits growth to continue to improve and rise to 4.8% in the year ahead, above the UK average (4.1%) and among the fastest rates of growth projected across the UK. This relatively optimistic outlook is likely underpinned by Energy, Water & Mining and Manufacturing & Engineering which have the strongest expectations for profits growth among UK sectors.
Investment
The Scottish investment environment has been subdued in the first half of 2025, with negative growth reported in Q2 2025. However, businesses reported an uplift in Q3 2025, with annual capital investment growth rising to 3.9%, the highest figure across all parts of the UK. However, with both uncertainty and interest rates remaining high, businesses appear to remain cautious about future investment and plan to increase capital expenditure by just 0.6% next year, the lowest projection in the UK and considerably below the regional historical norm (2.1%).
Scottish businesses also expanded their R&D budgets at above average rates over the year to Q3 2025, lifting growth to 2.9%, well above the historical average (2.0%) and the joint fastest rate recorded alongside London. Companies expect to maintain a relatively strong rate of growth next year, planning a 2.6% rise, which is the fastest pace of expansion planned across the UK.