Scottish economic bulletin: May 2025

Overview

Scottish economic growth has strengthened at the start of 2025 following a weak end to last year, however business activity and consumer sentiment indicators remain weak, in part reflecting the backdrop of increased global economic uncertainty and the recent increase in inflationary pressures.

Scottish GDP grew 0.7% in the 3 months to February, strengthening from zero growth in the final quarter of 2024. Furthermore, growth was broad based across the Services, Construction and Production sectors. This pattern of stronger growth has also been seen at a UK level, with more recent data showing UK GDP growth of 0.7% in the first quarter of 2025, improving notably from the slow-down in the second half of 2024. Scottish GDP data for March will be released on 28 May.

Despite the recent pick-up in GDP growth, business surveys continue to indicate weakness in business activity. The RBS Growth Tracker indicated that business activity fell for a fifth consecutive month in April, albeit to a slightly lesser extent than in March, partly reflecting further declines in new business orders. Taxation remains the main concern for businesses in May following the introduction of the rise in employer NICs, alongside falling demand for goods and services, though the recent increase in both labour and broader input costs is also adding to business cost pressures.

Business concerns regarding falling demand is reflective of the risks from weak consumer sentiment, with the Scottish Consumer Sentiment Indicator falling in March to its lowest level since August 2023. The recent fall in sentiment likely reflects a range of domestic and global trade uncertainty factors that are weighing on consumers sentiment regarding the economy and their household financial security.

As expected, inflation rose in April to 3.5%, driven by increases in energy and water bills. In their baseline forecast, the Bank of England expect inflation to rise temporarily to 3.7% in September before gradually declining back towards 2%. There are clear risks in both directions on this forecast, reflecting the potential impacts of trade uncertainty and the persistence of underlying domestic inflationary pressures. However, the recent cut in Bank Rate to 4.25% should help support consumer and business activity in the face of this heightened uncertainty.

The labour market continues to perform strongly, with the unemployment rate at 4.3%, and though the fall in payrolled employment over the year remains indicative of a loosening labour market, wider business recruitment data remains mixed. While nominal earnings growth remains broadly stable, the recent rise in inflation has seen the pace of real earnings growth slow to 2.2% in April.

Looking ahead, the recent increase in uncertainty has been reflected in a broad based downgrade of economic forecasts from the end of last year with UK growth now expected to weaken slightly in 2025. The SFC will publish their latest forecasts for Scotland at the end of May.