Scottish economic bulletin: March 2025

Business Conditions

Business activity weakened marginally in January though to a lesser extent than at the end of 2024.

Business Activity

• The RBS Growth Tracker indicates that private sector business activity contracted marginally in January 2025, after a sharp fall in December, with the Business Activity Index at 49.6 (below 50 indicates a decrease in activity). This follows a period of growth over 2024, which slowed in the latter half of the year.
• The decline in business activity partly reflected a further fall in new business orders for a fourth consecutive month (47.5). ^[4]

• Broader Growth Tracker indicators also suggest weaker business activity with the employment index falling to 48.6. Business optimism rose marginally to 55 (from 54.7), remaining positive on balance albeit still lower than for 2024.
• The Scottish Business Monitor for Q4 2024 also recorded a slowdown in business and new business activity with both indicators falling further into negative territory in the final quarter of the year.^[5]

Business Concerns

• The Business Insights and Conditions Survey (BICS) shows that falling demand for goods and services remains the most reported concern for businesses for March (14.6%) but has fallen slightly from the rates in the second half of 2024.^[6] The latest data also show the recent sharp increase in concern regarding taxation since October eased, falling to 12.4% for March (from 15.4%).
• Issues that had been widespread concerns in previous years continue to be cited by fewer businesses. Energy prices were highlighted as a concern by 6.7% of businesses, which remains notably lower than in 2023, while concern regarding inflation of goods and services prices was reported by 8.8% of businesses.

Business Costs

• Over 2024, producer input prices were generally falling on an annual basis and feeding through to further output price stability.
• Latest data for January show producer input prices continued to fall on an annual basis (-0.1%), albeit at a slower pace than in December (-1.3%). This partly reflected a fall in input fuel prices which fell by 14.0% annually in January, partially offset by a 1.5% rise in crude oil inputs (having fallen 12% annually in December) and a 1% rise in prices of ‘other parts and equipment’. ^[7]

• In terms of the feed through to output prices, producer output prices rose in January by 0.3% annually, up from a fall of 0.1% in December. The increase was partly driven by a 2.2% rise in the prices of food products while the price of outputs of coke and refined petroleum products fell 14.1%.
• More broadly, the RBS Growth Tracker indicated that the rate of input price inflation rose moderately in January, with the input price indictor rising to its highest level since August 2023, indicating that businesses are continuing to face rising input costs.^[8]
• The Scottish Business Monitor reported that cost pressures remain an ongoing concern for businesses with 77% of businesses reporting higher total employee costs at the end of 2024 and 94% expect total employee costs to rise further in the first six months of 2025.
• These factors were also identified in BICS data for March, showing 44.1% of businesses are considering price rises because of labour costs, broadly similar to February (44.2%). The share of businesses reporting that they were not considering price increases (36.0%) has notably fallen through the turn of the year.

Business Investment

• Business concerns around demand, cost pressures and borrowing costs continue to impact business investment decision making.
• The Scottish Business Monitor for Q4 2024 showed a slowdown in business investment levels where the new capital investment indicator was observed to reach its lowest level in the year (-21.6).^[9]
• More recently BICS data indicates a slight improvement in investment expectations for the start of 2025. 18.5% of businesses expect to increase their capital expenditure in the first quarter of 2025, up from 15.6% in the fourth quarter of 2024. The share of businesses expecting to maintain capital expenditure remained stable at 37.5%, while the number of businesses expecting to reduce capital expenditure fell by 0.3 p.p to 9.9%.

Business Optimism

• RBS Growth Tracker data shows that businesses continue to expect positive growth over the next 12-months, however the level of optimism in January was at its second lowest level in two years (55), albeit picking up marginally from December (54.7).
• Latest BICS data also points towards softening business sentiment, with a decrease in recent months in the share of businesses reporting that they expect performance to increase over the next 12 months. In February this share was 28.9% compared with 33.0% in January.