Business activity across Scotland remains subdued, with the latest Fraser of Allander Institute (FAI) Scottish Business Monitor showing that the tentative recovery seen earlier in the year has largely stalled.

More than 200 firms from 31 of Scotland’s 32 local authorities took part in the survey for the third quarter of 2025, offering insights into their relationship with the Scottish Government, progress towards Net Zero, and expectations for the economy.

Despite slight improvements in sales and employment, overall performance across all key indicators remains in negative territory, according to the report.

The net balance for sales rose by just 0.5 percentage points to -12.3, suggesting a marginal continuation of recovery from Q1’s low point. However, more firms still reported falling sales than rising.

New capital investment dropped 1.8 points to a net balance of -20.4, indicating continued reluctance to commit to spending despite stable credit conditions. Similarly, new business activity declined by 2.7 points to -16.0 with difficulties in generating demand plaguing progress.

Beyond this, turnover fell by 1.1 points to a net balance of -11.4 – falling sales and persistent inflation not helping things in that regard.

In slightly less terrible news, employment showed a small improvement, rising 1.4 points to -8.5, marking the only indicator not in double-digit negative territory (crack open the champagne).

Export activity remained weak at -16.6, though the 8.7-point increase from the previous quarter suggests some stabilisation following disruption earlier in the year.

Relations with government improve, but influence declines

Relations between businesses and the Scottish Government have improved modestly since last year, according to the FAI.

The share of firms agreeing that the government understands the business environment rose from 8.6% to 11.8%, while positive views on government engagement increased from 5.6% to 11.5%.

However, fewer businesses now feel they have influence over policy.

The share who believe they know how to affect government decisions fell from 18.6% to 14.1%. According to the report, this may suggest that while communication has improved, participation in policymaking has not.

Net Zero readiness remains limited

Readiness for the Net Zero transition continues to lag. More than two in five firms reported being not at all prepared financially, operationally, or strategically.

Further, around one in three said they were partly prepared, while fewer than one in twenty considered themselves fully prepared.

Strategic planning appears to be the strongest area, suggesting long-term visions are being aligned with Net Zero targets.

However, nearly half of all firms are unprepared financially, indicating a lack of understanding of how to fund the transition. The report notes a “hollowing out” effect, with most firms either partly prepared or entirely unprepared, and few progressing from the latter group.

Cost pressures ease but remain high

Cost pressures eased slightly during Q3 2025, though they continue to weigh heavily on Scottish firms.

The share of businesses reporting higher total costs fell from 82.8% in Q2 to 78.4%. Looking ahead, 80.1% expect further increases over the next six months – down slightly from the previous quarter.

Total employee costs remain the most significant pressure, though the proportion of firms reporting increases fell from 89.7% to 78.4%. Wage costs followed a similar pattern, with 71.2% reporting higher costs in Q3 compared with 81.9% in Q2.

Unlike employee costs, however, wage pressures are expected to rise again over the next six months.

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Unsurprisingly, energy costs are emerging as a growing concern. Just over half of all firms reported higher energy costs in Q3, while nearly two-thirds expect further increases over the next two quarters.

Outlook and sentiment deteriorate

The downward trend in sentiment observed since mid-2024 appears to have stabilised, with the net balance of expected business volume plateauing at -12.6% in Q3 2025. However, overall optimism remains at nadir levels of weak.

Economic and political uncertainty ahead of the UK Government’s Autumn Budget ranked among the top concerns for Scottish businesses, overtaking traditional issues such as credit and staff availability. Labour shortages continue to be a significant challenge, with firms citing staff availability as a key constraint.

The broader economic outlook has worsened, with 81.3% of businesses expecting weak or very weak growth over the next year.

By contrast, only 1.5% anticipate strong growth, and none expect very strong growth.

The share of firms forecasting moderate or strong expansion has declined, with expectations shifting toward a “very weak” outlook for 2026.

Oh dear.