BUSINESS confidence in Scotland has emerged from 18 months of decline to show a rise in the first quarter of this year, according to research from the Federation of Small Businesses (FSB).

Its latest business confidence index, while still in negative territory, showed an 8.5 point climb, from -28.9 at the end of 2016 to -9.6 in the first three months of 2017. The UK metric rose from +8.5 points to +20 in the same period.

The study also suggested that the Scottish economy is unlikely to rebound in the short term as firms who expect conditions to improve are still significantly outnumbered by those who expected them to worsen.

Andy Willox, FSB’s Scottish policy convener, said: “Scottish business confidence couldn’t fall much further at the end of 2016.

“A bounce at the start of this year is welcome, but looks like it will be tricky to sustain given that firms are reporting falling revenues.”

Data show that Scottish small business revenues declined at the fastest rate for four years, but most firms expect sales and turnover to grow over the course of this year.

The state of the domestic economy continued to be reported as the biggest barrier to growth by almost half (49 per cent) of respondents. Official figures published last week showed the Scottish economy contracted by 0.2 per cent during the fourth quarter of 2016 – a drop foreshadowed by last quarter’s confidence index.

“Too few Scottish businesses have faith that our economy is travelling in the right direction,” said Willox.

“The UK Government needs to convince firms that their plans for Brexit will safeguard their interests. The Scottish Government and our local councils also need to put local growth at the top of their agenda.”

Small business employment growth in Scotland was flat this quarter, according to the study. And, while this was set to rise over the next three months, hiring intentions were still much lower in Scotland than the UK average.

The rise in the National Living Wage, the resultant National Insurance and pensions auto-enrolment would leave the average smaller employer with an extra £2600 employment costs over the coming year, said the FSB. Respondents reported a marginal 0.3 per cent overall increase in their workforce, reversing the decline of the previous quarter by more than 10 percentage points, and 7.8 per cent predicted they will boost staff numbers over the next three months. A majority predict sales and turnover growth in 2017, with a 10 point rise from the previous quarter, but the study also found revenues had declined at the fastest rate for four years with 42.3 per cent reporting a fall, giving a net balance of -11 per cent. Four in 10 firms cited consumer demand as a brake on growth, while a quarter blamed skills shortages and an increasing number raised concerns about rising costs for inputs, fuel and utilities.

Willox added: “While economic silver bullets are in short supply, there’s plenty to be done to help firms drive local growth. For example, if we want to see smaller firms continue to create jobs, an expansion to the employment allowance must be delivered.

“In addition, Scotland’s smaller firms are now seeing overheads rising, while they continue to be owed billions of pounds in big business late payments. Efforts to address this problem seem to have stalled – we need to see them kick-started.

“Closer to home, a third of our local roads are in an unacceptable condition and Scotland lags behind England on every measure of digital connectivity. We need urgent action to fix our broken local infrastructure.”