Scottish businesses are “entrenched” in pessimism, with companies squeezed by relentless cost pressures, stalled investment and scant expectation of short‑term relief, according to the Fraser of Allander Institute.

The FAI’s latest Scottish Business Monitor, which tracks business sentiment from over 250 businesses across all 32 Scottish local authorities, signals an uneasy start to 2026, with all six headline indicators in negative territory for a fifth consecutive quarter.

Over the final three months of 2025, more businesses reported a decline in employment, with official data showing nearly 15,000 fewer employees on Scottish payrolls last November compared with a year earlier, with firms also reporting weak turnover over the period, including through the traditionally strong ‘golden quarter’.

Cost pressures are adding to the woe, with nearly 80% of Scottish businesses facing higher total costs in recent months, and around nine in 10 expecting costs to rise over the first half of the year, despite energy prices easing.

The study shows staffing costs are biting hard, with 80% of firms facing higher total employee costs in recent months, driven by rising wages, pressures which rank among businesses’ biggest concerns for the next six months.

This is slightly at odds with the latest Business Barometer from Bank of Scotland, which found 42% of Scottish companies expect to increase headcounts over the next year, up one point on December’s figure. This suggests that while firms are feeling squeezed, many still see a need to expand their workforce to meet demand and plan for growth.

Economic and political uncertainty is weighing heavily, meanwhile, with more than 90% of companies citing economic and business uncertainty as “important/very important”, though on the bright side, access to credit is not seen as a major constraint, with the cost of credit having risen for fewer than half of firms.

The FAI said that this suggests Scottish businesses are reluctant, rather than unable, to commit to new investment opportunities, essentially playing safe in an unstable macroeconomic environment.

There are early signs of adaptation, however, with AI adoption spiking across all major sectors in the last three months.

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More than half of all surveyed businesses reported incorporating artificial intelligence in some capacity by the end of 2025, with once reluctant industries like construction, manufacturing, and production now reporting rising levels of adoption.

The report suggests this is evidence of a “gradual and broad diffusion” of the technology throughout Scotland’s economy, with businesses continuing to explore AI’s productivity benefits to offset pressure elsewhere. 

“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,” said João Sousa, deputy director at the Fraser of Allander Institute.

“Persistent cost pressures, weak investment and heightened uncertainty underline the importance of policy clarity and stability if confidence is to recover.”