Scottish Economic Bulletin: October 2026

Overview

Scotland’s economic growth has been resilient in the first half of the year and has strengthened over the last 3-months in the face of rising inflation. Business activity indicators have also improved, however the persistent upward pressure on energy and fuel prices is weighing on the labour market and forward looking sentiment indicators and remain a key risk in the second half of the year.

The Scottish economy grew 0.7% in the three months to July and has grown 1.1% on an annual basis. Recent growth has been driven by the services sector offsetting more moderate growth in production and a fall in construction output. Despite the resilience in growth, business surveys continue to indicate that demand conditions remain subdued, albeit there have been some improvements in business activity indicators compared to earlier in the year.

Business cost pressure indicators also improved moving into the third quarter, however the pick-up in wholesale oil and gas prices since August and the increase in fuel prices have recently caused business concerns about energy prices to increase again. Furthermore, it continues to present a challenging pricing environment for businesses in the face of subdued demand conditions.

Inflation increased to 3.1% in August, largely driven by petrol and diesel prices, and is expected to increase closer towards 4% around the turn of the year as higher energy prices more broadly are priced in, including the 4% rise in the Energy Price Cap in October.

Consumer sentiment continued to strengthen in August with the indicator rising to its highest level since February, although it remains weak overall. Furthermore, out of the five sub-indicators, attitude to spending and expectations for household financial security remain the weakest.

Business optimism for the year ahead also remains mixed with businesses on balance continuing to expect activity growth. This follows resilient business activity during the summer months, however there are indications that the level of optimism has eased in the face of rising concerns about energy prices and the persistence of inflation pressures more broadly.

The labour market continued to loosen in the 3-months to July. Annual earnings growth slowed notably in August, and unemployment has risen to 5.1%. While the claimant count increase has been more muted, the number of payrolled employees has fallen to its lowest level since the start of 2023, with the largest percentage falls over the period in mining and quarrying and ICT. Recent business survey indicators suggest staffing levels are perhaps stabilising, however labour costs and uncertainty in the outlook continue to present downside risks to recruitment activity.

Overall the economic landscape for the forthcoming UK and Scottish budgets is challenging. Rising inflation and elevated uncertainty continues to obscure the outlook and raises the risk that business and consumer sentiment will weigh on activity and growth.