Scottish Chambers of Commerce want urgent action to help firms cope with the soaring costs which are undermining recovery and growth after the pandemic.
Stephen Leckie, the SCC president, said today: "The immediate costs crisis is on energy prices.
"The UK Government must act on the calls from businesses to introduce an SME energy price cap and cut VAT on energy bills from 20% to 5%. This immediate support would shield businesses in a similar way to households."
The president also urged the Scottish Government to extend the length of the 50% business rates reliefs for the retail, hospitality, and leisure sectors, plus carry out a "fundamental" reform of the business-rates system.
He was speaking as the SCC published its latest quarterly economic indicator in partnership with Fraser of Allander Institute.
Mr Leckie said: "The survey reveals that cost and inflationary pressures are deterring investment and forcing businesses with little choice but to make difficult decisions for business survivability.
"These include holding back or, in some cases, pulling back investment, putting projects on hold due to supply-chain disruption, and in extreme situations considering whether or not to have the heating and lights on or off."
Reversing economic decline
"Urgent action is needed now from the Scottish and UK governments if we are to reverse the tide of economic decline, restore confidence and put the economy back on the road to growth."
SCC said rising prices of energy, food and raw materials, coupled with labour market insecurity and a tightening of consumer purse strings, have shrouded the economy with weaker growth prospects.
It added: "The perfect storm of the costs crisis, exacerbated by the conflict in Europe, has led to a cashflow crunch which has frozen investment, led to price increases for consumers and squeezed profit margins."
Key findings of the study:
- Inflationary concerns dominate
UK inflation has reached 9.1%, the highest in 40 years. Since April 2022, inflation has doubled and nine in 10 Scottish firms across all sectors surveyed are continuing to report major inflationary pressures.
Businesses continue to be impacted by rising energy bills - seven in 10 firms report that it is the largest contributor to their cost pressures. Fuel and labour costs, alongside raw material prices, are also significant concerns.
Over three-quarters of all firms have indicated that they intend to raise prices next quarter. The sectors that reported the largest increases from the previous quarter were financial and business services and tourism.
- Labour-market uncertainty
Recruitment difficulties have seen a 10% increase from the previous quarter, with half of all firms reporting increased challenges hiring staff. The sectors that saw the largest increases from Q1 were the financial and business services, manufacturing and retail sectors.
Decisions on investment have been held back with 50% of all firms reporting no changes to levels of investment in the next quarter. The construction, retail and tourism sectors have reported significant cuts to investment over the last quarter.
Mr Leckie said the recovery of Scotland's flagship retail and tourism sectors continues to lag behind, with reduced footfall and reserved consumer spending hitting firms hard.
He added: "This is being amplified by rising cost pressures, faltering cashflow and profits, resulting in falling investment and drained confidence.
"The Scottish Government must extend the 50% business rates reliefs available for the retail, hospitality, and leisure sectors, from the first three months of 2022-23 to the first six months.
"This should be done in conjunction with fundamental reform of the business-rates system, to ensure that the system is fair and non-regressive. This should not involve burdening businesses with a higher poundage rate, as was suggested in the latest spending review.
"Consumer footfall and spending must also be incentivised in order to support households and the recovery of our town and city centres."
Consequences of rising inflation
Mairi Spowage, director at the University of Strathclyde's Fraser of Allander Institute, said the consequences of rising inflation are being felt across the economy, with clear signs that consumer confidence is being dented and that people are cutting back on both essential and non-essential spending.
She went on: "Alongside this, there is an increasing fear that high inflation will be more persistent than was first thought, with expectations now that it may be 2024 before we get back to more normal levels of inflation.
"This survey published today highlights concerns that businesses have about rising costs. Current data suggests that the experience of input price-rises for businesses is running at 22%: still more than double the consumer inflation rate.
"This may mean that these cost pressures may continue to feed through to prices experienced by consumers as more businesses face difficult choices."