Press & Policy

Unlike any other of the five key sectors covered by our quarterly survey, the services sector has been consistently resilient in recent years. Over the 12 months, sector confidence averaged +5%, even as the wider economy remained in negative territory.

That changed in Q2 2026. Our latest Quarterly Economic Indicator shows confidence falling to -5%: the sector’s first negative reading since Q4 2022.

As Scotland’s largest sector, services is often a bellwether for the wider economy, and any challenges it faces are rarely experienced in isolation: if services is down, the chances are other sectors are feeling it too.

It’s not only our data that is showing a trend in the wrong direction. June’s UK Services Purchasing Managers’ Index (PMI) showed the slowest pace of sector activity for more than three years.

Our data tells us that this dip is most likely due to a combination of rising cost pressures and weakening investment.

Looking firstly at cost pressures, labour costs remained the single greatest pressure facing services firms, cited by 63% of respondents. Energy costs were also flagged by over half of businesses (53%), the highest level since Q1 2023 during the energy crisis, highlighting the continued strain on operating costs.

Rising pressures from both labour and energy costs are significant because they point to persistent inflationary pressures within the services sector, increasing the risk of higher prices, reduced business confidence, and slower expansion plans.

One firm from Moray summed up the impact of these increased pressures:

“Increases in employer National Insurance contributions have had a significant impact on the business. We also have growing concern about the impact of the war in Iran. Lastly, the minimum wage increases have closed the gap between more and less skilled staff.”

The other key trend which gives cause for concern is investment.

Across every investment measure, businesses reported contraction on balance for the first time since Q4 2020, with a particular withdrawal of capital investment.

Services firms are increasingly siding in favour of ensuring they can cover their costs first and foremost as opposed to expanding and investing.

The decline in investment matters because today’s investment decisions shape tomorrow’s growth, with prolonged weakness potentially limiting productivity gains, constraining job creation and reducing the sector’s long-term growth potential.

One business in Edinburgh highlighted the growing dilemma faced by firms:

“We are a small business keen to get business premises but between high rent and business rates this is proving almost impossible for us, especially as we are looking to take on staff this year.”

The combination of rising cost pressures and weakening investment suggests businesses are becoming increasingly focused on managing immediate challenges rather than planning for future growth.

If sustained, that shift risks slowing productivity improvements, limiting job creation and reducing the sector’s contribution to the wider economy.

Businesses are telling us they want to invest, recruit and grow, but rising cost pressures and ongoing uncertainty are making those decisions increasingly difficult.

Providing greater certainty through stable, multi-year tax and fiscal policy, reforming Scotland’s business rates system and helping firms manage rising operating costs would give businesses the confidence to invest, recruit and grow once again.

Scotland’s largest sector has long been one of its greatest economic strengths. Ensuring it has the confidence to invest again will be critical not only for services businesses, but to ensure the wider economy can thrive.