THE cloud of Brexit is being been blamed for Scotland’s economy being weakened in the first quarter of this year, and business leaders say it is hampering the country’s ability to compete internationally.

In its latest Quarterly Economic Indicator, Scottish Chambers of Commerce (SCC) said key industrial sectors have experienced a slowdown in investment as costs and Britain’s exit from the EU take top priority. It said every sector it surveyed faced rising wage pressures, with construction and retail reporting the biggest pay rises in more than 12 years.

Investment performance was also lower in every sector year-on-year, except construction, while a wait-and-see approach to spending left investment intentions restrained. The SCC said the level of business optimism was lower compared to the previous quarter across all sectors, apart from retail.

Manufacturing had been particularly badly hit as confidence dipped to its lowest level recorded in the sector since 2012.

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Tim Allan, chair of the Scottish Business Advisory Group and SCC president, said: “The prospect of a no-deal Brexit has undoubtedly taken a toll on business confidence in Scotland in the first quarter of 2019. Companies in Scotland are caught in a pincer movement of business challenges.

“On one hand, businesses are faced with increased cost pressures such as rising costs due to currency weakness and higher wages, and on the other they are hit by the dampening effects of political turmoil caused by the ongoing uncertainty of our future relationship with the EU.

“There is an immediate urgency to deal with Brexit, which is hampering our ability to compete on the international stage.

He continued: “We see this borne out in the decline in confidence, difficulties in recruitment and challenges in exporting.

“Furthermore, restraint on plans to invest will do nothing to solve Scotland’s ongoing productivity challenge which requires sustained levels of investment in skills and training if we are to see the shift the economy needs.”

Allan added that Scottish firms were coming under increasing pressure.

He said: “Our survey has shown some real areas of robustness which highlights the resilience of Scottish businesses and their resolve to stay focused on creating jobs and paying taxes to fund vital public services.

“But the pressure on Scottish firms is rising, with the prospect of increased costs due to inflation, currency volatility, Brexit preparations and the prospect of increased taxation remaining as top concerns for all sectors.”

Professor Graeme Roy, director of the University of Strathclyde’s Fraser of Allander Institute, said Brexit was casting a shadow over business.

“The lack of clarity about the UK’s terms of exit from the EU continues to cast a shadow over day-to-day decision making, with businesses clearly struggling to make long-term plans in such times,” he said.

“Weak business investment has been a feature of recent times, and this latest survey shows that firms are becoming even more reluctant to make investment decisions at this present time.”

Finance Secretary Derek Mackay said the report showed that Brexit uncertainty was weighing on business optimism and investment.

He said: “It is clear that there is a great deal at stake for every business, and their voices must be listened to before irreversible decisions are taken.”