The Scottish Business Monitor found businesses feel misunderstood by the Scottish Government and are unprepared for net zero as last quarter’s tentative recovery in activity stalls.

The latest report of the Fraser of Allander Institute’s quarterly Scottish Business Monitor, which surveyed over 200 businesses from 31 of Scotland’s 32 local authorities, revealed businesses’ relationship with the Scottish Government, readiness for the Net Zero transition, current business activity, and expectations for the economy over the next year.

Sales and employment saw modest improvements from last quarter, with net balance (i.e., the share of firms reporting higher minus the share of firms reporting lower) up 0.6 percentage points and 1.4 percentage points, respectively. Export activity also showed some improvement. However, net balance for all six of the Scottish Business Monitor’s key indicators remain deep in negative territory.

The report’s key findings also highlight that businesses continue to face a challenging environment, with rising costs, subdued investment, and displaying increasingly cautious sentiment:

  • Government relations: show modest improvement from last year, with 12 percent of respondents saying the Scottish Government understands the business environment (up 3 percentage points). However, only 14 percent feel they know how to influence policy, down from 19 percent.
  • Net Zero readiness: remains low. More than 2 in 5 businesses report no financial, operational, or strategic preparations whatsoever, whilst approximately 1 in 3 businesses are partly prepared, with the remainder mostly still in the planning stage.
  • Cost pressures: have eased slightly but are still a significant issue. 78.4 percent of respondents reported higher total business costs this quarter. Looking ahead, cost pressures are expected to persist, with 80.1 percent expecting total business costs to increase in the next 6 months.
  • Total employee costs: remain the most significant component cost pressure in Q3, and energy costs are expected to become a rising cost pressure over the next two quarters.
  • Uncertainty dominates: ahead of the UK Government’s Autumn budget. Economic and political uncertainty ranked as more concerning than traditional elements, such as staff and credit availability.

Economic outlook has worsened, with 4 in 5 businesses expecting weak or very growth in the Scottish economy over the next 12 months, this outlook was only expressed by 3 in 4 businesses in Q2. No respondents expected very strong growth, with a mere 1.5 percent expecting strong growth. This reflects declining optimism from businesses throughout 2025.

João Sousa, Deputy director at the Fraser of Allander Institute, said: “Businesses are still relatively pessimistic about the economic outlook, with cost pressures remaining high and uncertainty surrounding the Chancellor’s upcoming budget.

“Sales and employment data improved slightly, in a testament to business resilience.” Josh Hampson, Assistant Economist at the Fraser of Allander Institute, said: “The Scottish Government’s efforts to improve its relationship with businesses has returned some dividends. But a significant majority of our respondents still feel the Scottish Government does not understand the business environment, highlighting there’s still a way to go in changing this perception.”

You can read the full Scottish Business Monitor report here.

João is Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute. Previously, he was a Senior Fiscal Analyst at the Office for Budget Responsibility, where he led on analysis of long-term sustainability of the UK’s public finances and on the effect of economic developments and fiscal policy on the UK’s medium-term outlook.

Josh is a Knowledge Exchange Assistant at the Fraser of Allander Institute.