All sectors of the Scottish economy recorded “large and positive net balances” for their volume of business in the first quarter of 2022, with this positivity expected to continue over the next six months.

That’s according to the latest Fraser of Allander (FAI) Scottish Business Monitor, published in partnership with Addleshaw Goddard.

Scottish businesses said they have positive expectations for activity levels, employment and turnover, but also reported that inflationary pressure and supply chain issues pose challenges in the year ahead.

The report, which surveyed 500 firms in April from across the economy, revealed that overall Scottish business sentiment remained positive, with all core indicators, except export activity, remaining optimistic.

The rise in business volumes was matched in expectations for the levels of both employment and turnover in the coming six months.

However the report illustrated that the growing impact of inflationary pressure and supply chain issues is expected to have a marked effect on businesses, with more than one-third of companies expecting to reduce operations due to higher energy prices, up from one-fifth in the last three months of 2021.

The most common concerns among businesses for the rest of 2022 are the costs of energy (91%), the price of inputs (86%), and the availability of inputs (81%) and new staff (81%).

More than half of all businesses in Scotland are finding it difficult to source goods and services.

And almost 90% of Scottish businesses expect their prices to increase more than normal over the next year.

Staffing remains a source of concern for Scottish businesses, with both the cost and availability of employees proving a challenge.

Across the Scottish economy, a lack of required skills and experience was the most commonly reported factor making filling vacancies difficult (76%), followed by a lack of applications (69%) and wage expectations (56%).

Suzanne Moir, partner and specialist in energy and transport at Addleshaw Goddard, said: “The overall positivity shown in this report is good news and reflects what we are seeing and hearing from our own clients and contacts in all sectors of the Scottish economy.

“Businesses are adapting despite a combination of challenges, demonstrating both the resilience and innovation of these businesses.

“However the impact of rising prices, particularly in relation to energy, can be felt in all areas of our personal and business lives.

“The consequences of these price rises are already being felt, however one byproduct will undoubtedly be an acceleration of the energy transition.

“All businesses, not only those operating in the energy sector, are being driven to seek new ways to generate power and reduce their energy consumption both to combat rising prices and play their part in the move to net zero.

“All sectors of the economy are also operating in a competitive market for employees, particularly as the report has identified a gap in the number of candidates with the skills and experience required.

“Salary is one aspect of the equation, as is supporting people to be the best they can be in a flexible, collaborative environment, with interesting work.

“That can be a real differentiator along with fair remuneration and providing that balance to attract and retain the right people is a challenge that all businesses face.”

Fraser of Allander Institute director Mairi Spowage said: “Businesses continued to be optimistic in the first quarter of the year despite increasing concerns over inflation and supply chain pressures.

“However, there has been an increase in the number of firms that expect to reduce operations this year due to higher energy bills, with businesses in the retail and transport sectors particularly impacted by the ongoing hikes in energy prices.

“Due to global supply chain issues, Scottish businesses are also finding it hard to source the goods and services that they need and firms are facing higher prices for their inputs.

“Attracting and retaining talent remain key challenges for Scottish firms, particularly those in hospitality, as skills mismatches continue to make it difficult to fill vacancies.

“It will be interesting to see how inflationary pressures weigh on business sentiment as the year goes on.”