Scottish economic bulletin: May 2024

Overview

The economic outlook continues to improve, with the Scottish economy set to return to growth in 2024 after the economy remained largely flat in 2023, although growth is expected to remain modest. The UK outlook is similar, with the Bank of England's latest forecast showing growth of 0.4% in 2024. Globally, the OECD’s assessment is that there are signs that the global outlook has started to brighten, and the OECD forecast global growth of 3.1% in 2024, with European economies in particular growing more slowly this year than the US and other emerging economies.

Scottish GDP grew 0.4% in the three months to February 2024, although it fell in the latest month in the more volatile monthly data. However, it is now very likely that the economy will show growth in first quarter of 2024, confirming that the Scottish economy has avoided a recession. The growth in services (0.7% over the three months to February) is encouraging, particularly consumer facing services growth which remains high at 1.3% over the three months. The stabilisation of the manufacturing sector is also welcome, although the further fall in construction shows that growth is far from being widespread.

Stronger growth in consumer facing services is a sign of improved consumer confidence. Although the Scottish Consumer Sentiment Indicator remains negative and fell slightly in the first quarter to ‑6.2, it has improved significantly over the past year as the inflation rate has fallen, and households’ assessment of the economy’s performance continues to improve.

The inflation rate fell to 3.2% in March 2024, its lowest rate since September 2021 and is expected to fall further towards the Bank of England target rate in April, although ongoing pressure from core inflation means that it may again increase slightly over the course of the year. Markets’ expectations are for to the Bank Rate to fall during the year. The labour market continues to be robust, with unemployment falling to 4.0% in the latest data, and the number of payrolled employees in Scotland remaining close to its series high. Earnings also continue to grow faster than inflation, with annual earnings growth of 6.3% in March, 3.1 percentage points faster than inflation.

Latest business surveys show that business activity continued to strengthen into March 2024, with activity reaching its highest level in 11 months. While this mainly reflects strength in the services sector, overall business optimism for the year ahead continues to improve, and there are signs that business investment is strengthening.

Looking ahead, economic growth is forecast to strengthen, albeit modestly, across 2024 and 2025, as lower inflation supports real earnings growth. With interest rates also expected to fall this will support a pick-up in consumption. However, the path for inflation, earnings, and interest rates remains uncertain and will be an important determinant of the economic outlook. Risks to the economic outlook are becoming more balanced.