The weight of the cost of living crisis on Scottish businesses

Sharon McDougall

By Sharon McDougall, DAS approved money advisor at Scotland Debt Solutions

As we enter the final quarter of 2022 and the cold winter months, Scottish businesses face numerous serious threats that could undo profitability and company growth. As of Q3 2020, there were 8,249 construction firms in Scotland with one employee, according to Statista, of which a majority will likely be scathed by Covid-19 economic uncertainty, rising energy bills, inflationary pressures, broken supply chains, and the overarching cost of living crisis.

Triggered by the coronavirus pandemic and intensified by Russia’s invasion of Ukraine, these critical factors contribute to a string of challenges experienced by Scottish businesses and affect the output value of the construction industry which stands at around £15 billion. As the pressure increases on Scotland’s construction sector, will businesses collapse under the weight of the cost of living crisis, or show resilience?

The real cost of doing business

The economy rapidly transitioned as it switched from operating in steady waters, into pandemic conditions, then a state of Covid-19 recovery, followed by a pressured environment overshadowed by the Ukraine War. As a result of volatile market conditions, the rate of inflation rose which means that it will now cost more to run a business, purchase materials, and borrow money. As such, businesses must return to the drawing room to discuss how to ride through the turbulence by revising budgets and assessing affordability.

Price of materials – The price of construction materials increased by 24% in July 2022, compared to July 2021, according to the construction material price index from the Department for Business, Energy & Industrial Strategy (BEIS).

Although the cost of living crisis has been in effect since the pandemic, the energy crisis tipped the market into disarray from August 2021, followed by a sudden rise in interest rates in September 2022 and a subsequent increase in the price of building materials.

Construction materials, such as gravel, sand, clays & kaolin (including aggregate levy) experienced the greatest price increase in the 12 months to July 2022 at 63% and concrete reinforcing bars at 40%.

The increase in material costs likely affected planning applications which experienced a drop for the third successive month in 2022. According to Snap Analysis, ‘the lower activity was driven by the infrastructure sector, which has fallen from £4bn in March to £1.2bn in July’.

Supply chain pressures – Scotland’s supply chains are still recovering from the Covid-19 pandemic and Brexit. As the economy shut down during the pandemic and imports hit a standstill, materials were no longer easily accessible, and those that were in stock could only be purchased at an inflated price. Fed by these supply chain pressures and labour shortages, the price of construction materials hit a 40-year-high based on the annual growth of the BCIS Materials Cost Index.

Energy costs – The construction industry is energy intensive which means that manufacturing materials, such as steel, aluminium and glass will now cost more. This not only tightens profit margins, but also leads to inevitable price increases. As energy prices are up by 250%, a temporary discount will be automatically applied on business energy bills throughout the winter months under the Energy Bill Relief Scheme.

High interest rates, supply chain disruption, energy bills, inflated material costs and the pandemic are some factors that continue to affect the construction industry. To overcome the weight of the cost of living crisis, businesses must protect their financial health and adapt during these unprecedented times.