Sentiment tracked by ICAEW’s Business Confidence Monitor for Q1 2024 put confidence at 15.4 on the index, up sharply from the previous quarter, and well above the historical average for Scotland.

Confidence was likely boosted by strong export growth, which surged to 4.4% in Q1 2024, ahead of almost all other UK regions and nations. However, the country’s growth in exports is expected to lag behind the UK average next year.

Input price inflation in Scotland saw the slowest increase in the UK, and further moderation is expected in the next year. Selling prices also had a slower increase compared to the UK average, with a rise of just 3% in the year to Q1 2024.

Profits growth in Scotland stood at 4%, outpacing the UK average of 2.6%, but the picture for the next year is bleaker, with the weakest annual profit growth of anywhere in the UK forecast.

Scottish businesses said that regulatory requirements and the tax burden were the most prominent growing challenges, reported by 48% and 33% of firms respectively. Changes to income tax in Scotland could be a concern to some Scottish businesses, particularly those reliant on consumer spending, ICAEW said.

Domestic sales growth fell slightly in the quarter, but remained higher than Scotland’s historical average. While Scottish companies predict that domestic sales will improve slightly in the year ahead, this anticipated growth will still lag behind the rise predicted for the UK as a whole.

Employment growth in Scotland increased by 2.6% in the year to Q1 2024, more than double the historical average, while salaries increased by 3.1% in the year.

Scottish companies boosted their capital investment by 3.8% in the year to Q1 2024, outpacing both the UK rate and Scotland’s historical norm. However, businesses plan to increase investment by only 0.2% next year, the lowest planned rise in the UK. Research and development budgets are also predicted to rise more slowly in the next year, marginally behind the UK average and much lower than Scotland’s historical average.

As set out in a series of recommendations made to all political parties ahead of the upcoming General Election, the Institute has called for a new vision for a prosperous and productive UK economy that supports businesses in the next parliament.

David Bond, ICAEW Director, Scotland, said: “It’s encouraging that business confidence in Scotland has risen significantly to the highest level for two years, with sentiment likely boosted by lower inflation, strong export growth and high profit growth.

“However, concerns about regulatory requirements and the tax burden weigh higher on Scottish businesses than their counterparts in other parts of the UK.

“The UK economy is less resilient than it should be, leaving it vulnerable to shocks and less agile to embracing innovation. Building an economy with resilience at its core, an end to weak productivity and making the UK the best place to run a business, must be among the next government’s top priorities.”

Overall in the UK, business confidence more than tripled to 14.4 on the index, surpassing the pre-pandemic average for the first time in two years, as economic conditions improved. The boost was likely underpinned by positive sales and exports projections for the next 12 months, ICAEW said.