By Liz Cameron

A shot of optimism has been injected into the economy as recent data indicates the economy has emerged from a recession with a renewed sense of momentum.

The worst of the economic downturn may be behind us according to official statistics and our own Chambers of Commerce survey points to business confidence broadly stabilising.

But despite the official data, businesses are still experiencing extreme cost pressures which is hammering cashflow and profitability. The operating environment – nationally and globally – still remains exceptionally challenging.

Geopolitics has also moved up the agenda in boardrooms underlining the critical role governments will continue to play to ensure smooth trading conditions. Red Sea disruption and unresolved global conflicts are live issues businesses and communities require clarity on.

So on the one hand, the economy returned to growth in January, albeit limited, and inflation fell faster than expected, supporting our optimism that we may see sustained growth in 2024. On the other hand, it is almost certain that this growth is fragile and could be curtailed by global uncertainty, more anticipated price rises and persistent recruitment challenges.

Firms continue to compete for skills and talent resulting in higher wages in order to attract potential staff. This issue is typically the number one issue raised by businesses which is preventing growth. This issue is more pronounced in Scotland with wage inflation faster than the rest of the UK, due to the agreed public sector pay deals to avert strike action. The planned increase in the national minimum wage, whilst welcome for workers, will heap extra costs on the most vulnerable sectors such as hospitality and leisure explaining why labour costs is the number one cost pressure for these sectors.

It is not only at home that firms are struggling to secure the workers that they need but also from abroad. The fight for talent is not a local one but a global one and the United Kingdom needs an approach which is internationally competitive.

New hiring restrictions announced by the UK Government took effect just last week on April 4 which means companies are now navigating a new system of international recruitment. The decision by the UK Government to increase the wage threshold for a company hiring someone under the Skilled Visa route is problematic for Scottish business. Additionally, scrapping the Shortage Occupation List which included specific evidence-based skills shortages in sectors and provided a 20% discount on going rates of pay will make it more expensive for companies to hire skilled workers.

Under new rules, the earning threshold has increased dramatically from £26,200 to £38,700, a staggering 48% increase and a level far beyond the Scottish average wage. Take the UK’s shortage of programmers and software developers. A company hiring this role on the old system could hire an international worker on a minimum of £27,200, however, under the new system which went live on April 4 the salary is now around £49,000.

For many firms, this route is effectively redundant given the associated costs and will exacerbate the issue of labour market supply and skills shortages. Beyond that, there is a real risk of the UK’s international reputation declining as a result of reduced international participation in the workforce.

Whilst the overall policy intention is to reduce migration numbers rather than promote economic growth, it is unclear whether raising salary threshold will impact future levels of net migration. The UK Government has suggested around 300,000 individuals would have been refused a visa last year if these rules were in place. If visas are not granted then businesses are clearly prevented from a potential pipeline of talent.

Migration patterns rarely follow a linear trajectory and some evidence already points to the number of care visas decreasing before the Home Office announced the new salary threshold. This is one of the reasons it can be so difficult for policymakers to deliver political commitments on migration numbers as many factors including exchange rates and geopolitical issues can influence when and where an individual takes the decision to relocate.

Just as the economy is in a delicate balancing act between optimism and uncertainty, so too is the UK Government on balancing its ambitions to attract high skilled workers against addressing the domestic labour market supply concerns.

The policy changes are a major strategic shift and also act as a clear dividing line between the Conservative Party and the Labour Party. In the months and years ahead, the impact of this policy will be closely watched as it unfolds and we will determine whether the policy delivered economic benefits and supported our ambitions to grow, create and innovate.

Liz Cameron is chief executive of Scottish Chambers of Commerce