Scottish Economic Bulletin - August 2026

Overview

This edition of the Scottish Economic Bulletin reflects on latest indicators from the second quarter of 2026 into the first half of July, in which we saw signs of improvement in some sentiment indicators following the moderation in wholesale energy and fuel prices during this period. However the escalation of tensions in the Middle East again in the second half of July underlines the ongoing risks to energy prices and the outlook for inflation.

The Scottish economy grew 0.6% in the three months to May, strengthening to its highest 3-monthly rate since the first quarter of 2025. The pick-up in growth was broad based across the sector groups and on an annual basis the economy grew 1.2%. However, the monthly PMI business survey for Scotland indicates that demand conditions remained subdued in June with new business orders continuing to fall, though to a slightly lesser extent than in May.

Despite these challenges, there were signs of wider stabilisation in business conditions in June. Producer input price inflation fell from its recent peak of 9.3% in May to 7.3% in June, with business concerns about energy prices and inflation moderating over the month and a falling share of businesses reporting that these factors were causing them to consider raising prices.

CPI inflation fell to 2.6% in June and consumer sentiment in Scotland improved across May and June to -8.2, though it remains below its level in February prior to the Middle East conflict. However, inflation is expected to increase again in the coming months, with the Bank of England’s central projection for it to rise in the third quarter following the 13% increase in the Energy Price Cap in July and to peak at 3.2% in the fourth quarter as higher business costs continue to feed through to consumers.

Business optimism has shown a similar pattern of improvement in recent months, although businesses’ main concern remains falling demand, which alongside cost pressures has weighed on recruitment activity over the past year. Scotland’s labour market has loosened with the unemployment rate rising to 4.7% in the 3-months to May, its highest rate in 2 years. Vacancies have also fallen from last year albeit latest data indicates staffing levels remained more stable in June.

Looking ahead, the Bank of England’s central projection is for UK economic growth to slow this year to around 1.1% (from 1.3% in 2025). However, there remains ongoing uncertainty regarding developments in the Middle East with the recent escalation of military action in July leading to further volatility in oil prices and also gas prices (which are at elevated levels), and raising the risk that inflationary pressures exceed the Bank’s central projection. Furthermore, it risks stalling the improvements in business and consumer sentiment we have seen in recent months, which are an important basis of improving underlying demand conditions in the economy.