Scottish economic bulletin: May 2025

Business Conditions

Business activity remains weak in April as cost pressures continue to pick-up.

Business Activity

• Business surveys have reported that business activity weakened in Scotland across the first quarter of 2025. The Fraser of Allander’s Scottish Business Monitor for Q1 2025 showed steeper declines in all measures of business activity from Q4 2024 (excluding export activity) while the Scottish Chambers of Commerce (SCC) Quarterly Economic Indicator found that confidence had fallen from a year ago across all five sectors monitored in the survey.^[4],[5]
• Most recently, the RBS Growth Tracker for April indicates that private sector business activity contracted for a fifth consecutive month, continuing the pattern of weakening activity from the end of 2024. However, the pace of decline moderated slightly compared to March, with the Business Activity Index rising to 47.4, up from 45.9 in the previous month (a reading below 50 indicates decreasing activity).^[6]
• Falling new business orders remains a key driver of the weaker business activity, albeit that the pace of decline softened in April (47.2, up from 45.9).

• Broader Growth Tracker indicators suggest that while overall business activity continued to weaken in April, staffing levels remained stable, following four months of decline. Business optimism rose from 56.6 in March to 58.2, albeit remaining lower than was the case for most of 2024.

Business Concerns

• The Business Insights and Conditions Survey (BICS) shows that taxation remains the most reported main concern among businesses for a second consecutive month in May, having become a more prominent concern since the announcement of the increase in employer NICs. The share of respondents citing taxation (16.3%) fell slightly from April, with an increased share of businesses highlighting concerns around falling demand for goods and services (14.7%).^[7]
• These changes in concerns remain consistent with the SCC Quarterly Economic Indicator business survey for Q1 2025, which showed a majority of respondents across sectors reporting taxation as their leading concern.^[8]
• While inflation has become a less prominent concern from businesses since 2023, latest data indicate a slight pick-up in the share of businesses citing the issue from 9% in April to 11.5% in May. This is potentially reflective of the increase in international trade uncertainty in recent months. The share of businesses reporting energy prices as a main concern (4.5%), remains lower than in recent years.

Business Costs

• The recent increase in business concerns around taxation and inflation are reflected in wider business survey indicators showing an increase in cost pressures since the start of the year, related to the increase in employer NICs, minimum wage rates and broader input costs.
• Latest RBS Growth Tracker data for April indicated that both input prices (66.4) and output prices (57.7) are increasing at faster rates than earlier in the year, and have risen to their highest levels since June 2023 and January 2024 respectively.^[9]

• This follows from the Scottish Business Monitor for Q1 2025 which reported that 92% of businesses expect their operating costs to increase over the next six months, with changes in Employer NICs being identified by 78% of business as having resulted in increased overall payroll costs. In response, 47% of businesses reported reducing hiring or expansion plans, with 49% of businesses adjusting prices to pass on increased costs to customers.
• Furthermore, the SCC in their latest Quarterly Economic Indicator for Q1 2025 also highlight labour costs as a result of changes to employer NICs as the biggest pressure on business margins, with rising energy and raw materials costs also weighing on finances.
• Most recently, labour costs were also cited in BICS data for May, with 56.3% of businesses reporting them as a leading factor for considering price increases. This figure is broadly stable from April, where the number of businesses reporting this concern rose sharply (by 12.3 percentage points) after changes in Employer NICs and the NLW were introduced.
• Other cost pressures have also become more prevalent in recent months, with increasing numbers of businesses linking potential price rises to energy prices (26.7% in May), raw material prices (24.4%) and finances costs (17.8%).

Business Trade

• There has been a sharp rise in World Trade Uncertainty reflecting the recent escalation in trade tensions between the US and other countries following the announcements on tariffs. The World Trade Uncertainty Index has risen sharply from the second half of last year, rising from 9.88 in Q3 2024 to 66.31 in Q1 2025.

• New BICS data on the impact of US Tariffs suggests that the recent changes in US trade policy have not yet broadly affected Scottish businesses, with 64% reporting that US tariffs did not impact their business in the last month. A further 28.3% of businesses reported being not sure of the impacts at this stage which likely partially reflects the ongoing scale of uncertainty over the eventual path of trade discussions and agreements.
• Some businesses, however, have reported facing additional costs (3.7%) and reduced demand (2.4%). This pattern varies across sectors, with more manufacturing firms seeing costs increase (10.8%) than other sectors such as construction (1.8%).

• Looking ahead, businesses do not expect the impact of tariffs to change in the next month, with 84.2% of businesses either not expecting any impact or not sure whether or where there will be an impact.
• Among exporters specifically, 8% of businesses indicated the changes in US tariffs have resulted in increased costs and 5.1% reported reduced demand. Looking to the month ahead, more exporters expect demand to fall (11.4%), and to have to absorb business costs (6.9%), to pass on costs to customers (10%) and increased supply chain disruption (11.4%).

Business Investment

• The outlook for business investment remains mixed, with ongoing concerns about demand, economic uncertainty, and rising business costs continuing to weigh on capital expenditure plans.
• The Scottish Business Monitor for Q1 2025 indicated a further decline in new capital investment with the net balance falling to -26.6, down from -21.6 in the previous quarter. However, this pattern varies across sectors. The SCC Quarterly Economic Indicator for Q1 2025 showed that investment intentions among manufacturing firms have fallen and are lower than a year ago, while the construction sector has shown signs of recovery, with a net balance of 25% for capital and training investment, up from -6% over the same period last year.
• Latest BICS data show a further slight shift in capital expenditure expectations among businesses. Between April and June 2025, 19.5% of businesses anticipate increasing their capital investment, up from 18.5% in the first quarter, while the proportion of businesses expecting to reduce capital expenditure has also risen to 12.2% (from 9.9%) and the share of businesses expecting no change has declined to 30.9% (from 37.5%).

• Among businesses planning to authorise capital expenditure in the next three months, most (47.7%) report that this investment is to replace existing capital, but a growing share of businesses are investing to increase efficiency (19.2%, up from 16.8%) and expand capacity (15.2%, up from 13.4%). However, 18.2% of businesses report that uncertainty about demand or business prospects could limit their business' capital expenditure, with other reported factors including inadequate return on investment (7.7%) and the inability to raise external finance (6.8%).

Business Optimism

• The RBS Growth Tracker reports that business expectations for the year ahead remain positive, with optimism improving in April to 58.2 (up from 56.6) and its highest level since October 2024.
• Despite the recent improvement, business optimism remains lower than during the first half of 2024 and wider business surveys indicate a more mixed picture. The Scottish Business Monitor for Q1 2025 reported expectations of weaker business activity over the next six months, while the SCC Quarterly Economic Indicator indicated lower business confidence at the start of 2025 compared to the same time last year .
• Latest BICS data also indicate that while most businesses expect business performance to stay the same or improve, an increasing share of businesses expect that business performance will decrease over the next 12 months.