Scottish economic bulletin: July 2025

Overview

This edition of the Scottish Economic Bulletin focusses on latest economic indicators during the second quarter of the year in which we have seen further volatility in the global economic landscape, particularly in oil prices following the conflict between Israel and Iran, and businesses continue to adjust to the implementation of increased employer National Insurance Contributions (NICs).

Following a pick-up in growth during the first quarter of the year, the Scottish economy contracted by 0.2% in the 3-months to April as flat growth in the Services sector and a renewed fall in Production output more than offset stronger growth in the Construction sector. Anecdotal reports suggest this may partly reflect economic activity being brought forward in the year to avoid US tariffs, although as our analysis shows, the overall impact of tariffs on Scotland is expected to be modest.

The weakness in GDP growth has been reflected in business survey leading indicators with the RBS Growth Tracker signalling falling business activity in the first four months of the year, although the latest data for May and June indicate a return to growth, albeit modestly. However, demand remains fragile and businesses continue to report falling new work orders. This, alongside taxation, have been the two main concerns reported by businesses during the second quarter with increased labour costs following the rise in employer NICs adding to the cost challenges facing businesses.

Despite the rise in labour costs, the labour market remains resilient, albeit conditions continue to soften slightly. Unemployment rose to 4.2% in February to April and, although this is lower than a year ago, the number of payrolled employees in Scotland has also fallen 0.9% over the year to May. Business surveys have further indicated slightly reduced staffing levels in recent months, however latest data for June suggests this has stabilised, potentially indicating that reduced movement in the labour market reflects the current uncertainty facing businesses and labour market participants.

Elevated economic uncertainty continues to be reflected in weak consumer sentiment in Scotland. The Scottish Consumer Sentiment indicator did improve notably in May to -5.5, its highest level since December. However, sentiment remains firmly in negative territory with the weakness potentially reflecting the current increase in inflation back above 3% and the slowing pace of real earnings growth, alongside broader concerns regarding the scale of uncertainty in global economic conditions and the downside risks this presents to growth and inflation in the economy.

Encouragingly, the Growth Tracker indictor of business optimism continued to improve in June, albeit from a low base at the start of the year, as businesses’ growth expectations for the year ahead have strengthened despite the challenging conditions businesses are currently facing. More stable inflation expectations and reductions in interest rates are improving business conditions. This improving confidence and its potential feed through to activity and investment is important if forecasts of weaker growth this year are to surprise on the upside.