Tentative recovery for Scottish businesses, but confidence remains fragile.
Scottish businesses are showing tentative signs of recovery, despite tremendous uncertainty in business confidence and economic outlook for the remainder of 2025, according to the Fraser of Allander Institute at the University of Strathclyde.
The latest edition of its quarterly Scottish Business Monitor, which surveyed over 300 businesses across all 32 local authorities in Scotland, revealed that companies reported an improvement in net balance in the second quarter in 2025 relative to the first quarter across various categories – volume of business activity, volume of new business activity, turnover, employment, and capital investment.
While the overall net balances remain in negative territory, businesses surveyed reported a recovery after a tough start to the year in the first quarter. The only category where the net balance deteriorated even further from the first quarter was export activity as businesses reported a sharp decline from what was seen as a weak starting point in the first quarter of the year.
The report also found that more than 60 per cent of businesses have adjusted their operations because of the rise in employer National Insurance Contributions (NICs), with many adapting to this through a combination of strategies: cutting back on hiring or cancelling increases in their workforce, adding the extra costs on to prices, and reducing employee benefits and compensation packages. Nearly 40 per cent of businesses surveyed expect to make more adjustments down the road.
Relative recovery in the second quarter has thus far failed to crystallise into durable improvements in overall business sentiment, which continues to be affected by unpredictability around trade and tariffs, with firms still indicating that economic and policy uncertainty was more important than credit availability or staff availability.
Other key findings include:
- Almost one quarter of businesses expect moderate to strong economic growth in the Scottish economy over the next 12-months. While this number has increased from the first quarter, nearly three quarters of businesses surveyed still expect growth to remain in the weak to very-weak territory.
- Broader inflationary trends continue to affect businesses with 75 per cent of companies expecting increased employee costs over the next six months.
Sanjam Suri, Knowledge Exchange Fellow at the Fraser of Allander Institute, said: “The results in the second quarter marked a recovery of sorts after a very difficult first quarter. However, it’s clear that overall business confidence remains challenged. The tentative signs of recovery have thus far failed to make a dent in the economic outlook for the rest of the year. While most businesses have adjusted to changes in NICs, nearly 40 per cent of firms plan on making more adjustments, suggesting that the full impact of these changes are yet to materialise. “
Josh Hampson, Knowledge Exchange Assistant at the Fraser of Allander Institute, said: “The ongoing uncertainty around trade continues to show up in the sharp decline in the export activity from what was already seen as a weak starting point in the first quarter of 2025. Economic policy and political uncertainty are uppermost in the minds of Scottish businesses, even more than traditional factors such as borrowing costs or staff availability.”
Authors
Sanjam Suri is a Knowledge Exchange Fellow at the Fraser of Allander Institute. Sanjam works closely with internal and external partners specializing in business and economic analysis. Sanjam also lead's the Scottish Business Monitor publication. Prior to this, Sanjam was the Lead Country Risk Analyst at Export Development Canada in Ottawa. Sanjam has also worked as an Economist and Senior Economist at the Bank of Canada in Ottawa. Sanjam has an undergraduate degree in Mathematical Economics from Trent University (Canada), and a Masters degree in Financial Economics from Western University (Canada).
Josh is a Knowledge Exchange Assistant at the Fraser of Allander Institute.