SCOTTISH manufacturers have underlined their concern for the future in a key survey which reveals optimism in the sector has fallen into negative territory for the first time in two years.

And business investment across all sectors dipped in the third quarter compared with the second quarter of the year, according to Scottish Chambers of Commerce, which said the results hammer home the need for certainty around the UK’s departure from the European Union (EU).

Growing pessimism among manufacturers is highlighted by the latest Quarterly Economic Indicator Report from Scottish Chambers, which notes the impact of rising raw material costs on sentiment.

Separating the percentage of manufacturers reporting an increase in optimism from those flagging a decrease, the survey signalled a net balance of -4% for the third quarter. It was the first time the survey had shown a negative reading for manufacturing confidence since 2016, and comes after a positive net balance of 10% reported feeling optimistic in the second quarter of the year.

The negative sentiment filtered through to manufacturers’ expectations of future sales, investment and recruitment, the survey found, all of which were significantly lower versus the previous quarter. And, despite strong order books in the third quarter, more businesses reported a decline rather than an increase in cashflow (-4%) and profit (-3%).

Nearly two-thirds (63%) of respondents highlighted the pressure brought by raw material cost.

Neil Amner, chairman of Scottish Chambers’ economic advisory group, said: “It’s particularly concerning to see the manufacturing sector report a negative score for optimism. This is the first negative score reported since the third quarter of 2016, suggesting that the combination of rising material costs and continued uncertainty around future trading conditions are beginning to affect the confidence of businesses in this sector.”

The report comes as negotiations between the UK and the EU over Brexit enter a critical phase, with Prime Minister Theresa May due to address the leaders of the remaining 27 member states in Brussels last night.

Scottish Chambers said its third-quarter survey shows the Scottish economy continues to be resilient, and follows official figures which show gross domestic product in Scotland has expanded more quickly than in the UK as a whole for the last year.

It highlighted that 43% of firms had reported increased revenue overall, with 17% reporting a fall.

However, the survey, produced in collaboration with the Fraser of Allander Institute at the University of Strathclyde, signalled that optimism had weakened across the board compared with the second quarter. It found that 21% of firms reported that they were less optimistic about the business environment than they were in the second quarter. In quarter two, 15% of firms said they were feeling less optimistic, “suggesting declining optimism nationally”.

The survey, which captured the views of 390 firms, flagged that optimism had fallen on an annual basis. Some 28% said their optimism was lower than one year ago, which compared with 24% in the previous quarter.

However, Chambers noted that confidence remains generally stable compared with last year, noting that 32% reported higher confidence than the same time last year, with 40% stating that this is unchanged.

Firms which reported a more pessimistic outlook during the third quarter said that Brexit “continued to act as a headwind”, alongside material costs, exchange rate issues and the impact of additional tariffs between major economies.

Respondents which flagged higher levels of confidence highlighted improving sentiment in the oil and gas sector, larger infrastructure projects coming on stream, and steady consumer confidence. According to the report, the retail sector observed high levels of confidence, suggesting that good weather and growing tourist numbers had helped to stabilise footfall on the high street.

Professor Graeme Roy, director of the Fraser of Allander Institute, said: “This survey is further clear evidence of the importance of securing a smooth Brexit transition to protect Scotland’s economy.

“Whether you agree or disagree with the decision to leave the EU, it is essential that we have an orderly transition. The analysis undertaken by the Chambers of Commerce shows that it is vital that a deal is reached to enable firms to prepare and develop contingency plans.

“Crashing out of the EU in March next year threatens to severely impact on businesses right across the Scottish economy.”