Access to finance uncertainty in the euro blamed
CBI Scotland's latest Industrial Trends Survey, published today, suggests a spike in uncertainty about future demand is causing firms to scale back their plans to invest in innovation, training, buildings and machinery.
Employment numbers have also dropped in the past three months, the report says, and employment is expected to remain subdued in the coming three months as well.
The main reason cited for the drop in confidence is the continued uncertainty of the eurozone, the market for more than half of Scotland's exports.
Concerns have also been raised over the availability of external finance and the cost of finance to fund expansion and investment.
In the past three months new orders dropped for the third successive quarter, with the expectation the next quarter will be the weakest since April 2009.
The majority of firms who answered the CBI survey outlined their intention to reduce spending across all four of the CBI's investment indicators.
Its survey covers sectors such as textiles, chemicals, food and drink, metals and metals manufacturing,and mechanical, instrument, electrical and vehicle engineering.
The CBI survey suggests the total volume of new orders has fallen by 40 per cent in the three months to January, with domestic orders down 48 per cent against drops of eight per cent and 19 per cent respectively for the same period last year.
Export orders, by contrast, rose by seven per cent with volume output up by two per cent, against gains of 12 per cent and 18 per cent respectively for last year.
CBI Scotland director Iain McMillan said: "There is no getting away from the fact that this is a further set of disappointing results.
"A weak economy and worries over the eurozone - our biggest export market - are affecting business confidence, and this is leading firms into shrinking their investment plans.
"A clear and orderly resolution to the eurozone crisis will be essential to prevent further effects on both domestic manufacturing and the wider economy, and to lift business confidence."
McMillan has called on the Scottish Government to do more to help business, including the provision of 'pump-prime' funding - government spending in the commercial sector - to establish direct air connections to new destinations and hubs so Scots manufacturers can access new markets.