Scottish Economic Bulletin - August 2026

Economic Outlook

Inflation is projected to rise above 3% in the second half of the year.

• The near term global economic outlook continues to be significantly influenced by the ongoing tensions and uncertainty in the Middle East. The recent escalation of military action over the past month risks further intensifying and extending the upward pressures on oil and gas prices and the feed through to wider inflationary pressures and economic impacts.
• In July, the IMF forecast global economic growth to slow from 3.5% in 2025 to 3% in 2026 before rebounding to 3.4% growth in 2027. Global inflation of 4.7% is projected in 2026 (up from 4.1% in 2025) before easing back to 3.9% in 2027. The normalisation of supply chains through the Strait of Hormuz is key to this, however the latest escalation presents downside risks and highlights the uncertainty in the global outlook at this point.^[24]
• At a UK level, the latest HMT average of independent forecasts from the first half of July shows UK GDP growth of 1% in 2026 (down from 1.1% forecast in February prior to the Middle East conflict), and 1.0% in 2027 (down from 1.4% in Feb). This is broadly in line with Bank of England’s central projections from July of 1.1% in 2026 and 2027, albeit the Bank projected downside risks to the growth outlook from higher inflationary pressures.^[25],[26]

• The UK inflation outlook remains subject to a high degree of uncertainty. The HMT average of new independent forecasts from the first half of July show inflation of 3.2% at the end of 2026 (up from an average forecast of 2.2% in February) before easing back to 2.3% at the end of 2027.
• In July, the Bank of England set out three scenarios for the UK inflation outlook – central, mild adverse – which set out different paths for energy prices and the extent to which there are second round inflationary impacts.

• In each scenario, inflation is projected to rise in the second half of 2026. In the central scenario, inflation is projected to peak at 3.2% in Q4 2026, while in the mild scenario it is projected to peak at 3.0%. In the adverse scenario, inflation is projected to rise to 3.8% in Q4 2026 before rising further to peak at 4.5% in Q2 2027.
• In the central and mild scenarios, inflation is projected to return to the 2% target around the end of 2027 while in the adverse scenario, it is projected to remain above target throughout the forecast period.
• At this point, there is little evidence that the rise in energy prices has generated second round impacts, however the transmission of the price rises in recent months is still progressing and the recent escalation of tensions in the Middle East raises the risk of energy prices rising higher and lasting for longer. Furthermore, looking ahead, the Bank of England note that aside from energy prices, other global developments such as the rapid expansion of AI capacity and any disruption to food supplies as a result of extreme weather events, such as El Niño, could add to inflationary pressures.