Monthly economic brief: June 2023

Overview

Scottish economic activity has recovered from the fall in the second half of 2022, with latest data indicating that economic output remains more resilient than initially forecast. Although the ongoing tightness in the labour market coupled with stronger services sector growth are contributing to a greater degree of persistence in underlying inflationary pressures.

The Scottish economy grew 0.2% over the three months to April, with growth slowing from the first quarter and output falling over March and April. Weaker growth in the production sector has been a key driver over this period while there has been stronger growth in construction and the service sector. Consumer facing services output grew 1.1% over the three months to April, continuing its recent pattern of growth in the face of ongoing inflationary pressures.

Inflation is on a downward trend from its recent peak, however the latest data indicates a greater breadth and persistence of inflationary pressures than expected in recent months. Inflation was unchanged over April and May at 8.7%, with the inflation rate for services strengthening and food price inflation remaining elevated at 18.3%. More broadly, core inflation rose to 7.1%, its highest rate since 1992.

The resilience in economic activity since the start of the year has been underpinned by ongoing low unemployment in Scotland at 3.1%, while the gap between nominal earnings and prices growth has narrowed. That said, there remains significant pressure on household finances with some of the impacts of interest rate rises still to be felt. Furthermore, recruitment activity in the labour market has softened notably in recent months, in part reflecting the uncertain economic outlook, however it's too early to tell whether the recent rise in inactivity reflects a more persistent weakening in the labour market more broadly.

The rise in core inflation and strength of earnings growth were key factors in the Bank of England's decision for an accelerated 0.5 percentage point increase in the Bank Rate to 5% in June. Strengthening consumer sentiment in May further points to the underlying resilience in consumer demand, however latest PMI business survey data indicates a slight easing in business activity growth, emphasising the ongoing complexity of reducing inflationary pressures amid subdued growth. The fall in producer input price inflation to 0.5% in May should further reduce pressure as it feeds through.

Looking ahead, the Scottish Fiscal Commission forecast the Scottish economy to grow 0.2% in 2023, revised up from their previous forecast, but remaining subdued overall. The recent easing in output growth is consistent with this forecast, which is at best a low growth environment. However, the risk of more persistent inflation and interest rate rises creates a more uncertain and fragile outlook for growth.