Market Update: We break down the business implications, market impact, and expert insights related to Market Update: Fraser of Allander: Scottish economy enters 2026 with business confidence still fragile – Full Analysis.
Business confidence in Scotland remains weak, according to the latest Fraser of Allander Institute Scottish Business Monitor, with firms pointing to cost pressures, subdued investment and little expectation of short-term relief.
All six headline indicators in the quarterly survey – which tracks business sentiment from more than 250 firms across all 32 Scottish local authorities – have remained in negative territory for a fifth consecutive quarter. This degree of persistence, rarely seen in the series dating back to 1998, suggests that pessimism is becoming entrenched rather than transitory.
The report, covering Q4 2025, finds that labour market conditions continue to soften. Over the final three months of 2025, more businesses reported a decline in employment level, 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’.
Cost pressures remain the dominant concern: nearly 80 per cent of firms 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 – a particular challenge in an economy where services account for close to 80 per cent of output and labour costs are a key driver of inflation.
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 weighing heavily on decision-making. More than nine out of 10 firms cited economic and business uncertainty as “important/very important”, whilst the cost of credit had risen for fewer than half of firms. This suggests businesses are reluctant, rather than unable, to commit to new investment opportunities amid a subdued economic environment.
There are, however, some early signs of adaptation. Almost half of surveyed businesses reported using artificial intelligence in some capacity by the end of 2025, with adoption extending beyond services into construction, manufacturing and production. The Institute notes that the productivity implications of AI, including whether it complements or substitutes for labour, will remain a key area of focus in future analysis.
João Sousa, deputy director at the Fraser of Allander Institute, 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.”
The next Scottish Business Monitor will be published at the beginning of the second quarter of 2026 and will be the final edition released ahead of the Scottish Parliament election.