Scottish Economic Insights: April 2025

The Rise in Global Economic Uncertainty.

Geopolitical Risks and Trade Policy Uncertainty

The Scottish economy strengthened moderately over 2024 with an increase in economic growth, the continuation of low and stable unemployment and positive real earnings growth. More stable inflationary pressures and a gradual reduction in interest rates has also been reflective of improving economic conditions relative to 2022 and 2023.

However, the improvement in economic conditions has softened over the past six months as GDP remained broadly flat in the final quarter of 2024, indicators of business activity growth have slowed, business and consumer sentiment has weakened and short term inflationary pressures have picked up. Furthermore, the domestic and international economic landscape has shifted notably over that period leading to a rise in economic uncertainty and a significant downward revision in the economic outlook for the year ahead.

The World Geopolitical Risk Index has remained elevated at the start of 2025, in-part reflecting the ongoing conflicts in Russia and Ukraine and the Middle East, which continue to influence global supply chains and inflationary pressures.^[1] However this has now been accompanied by a sharp rise in the World Trade Uncertainty Index reflecting the recent escalation in trade tensions between the US and other countries following the announcements on tariffs.^[2]

The tariff measures announced by the US on 2 April, which included a 10% additional tariff on all goods imports into the US and a broad range of country-specific reciprocal tariffs, generated significant financial market volatility reflecting raised expectations that they will lead to weaker economic growth and higher inflationary pressures at a global level over the coming year.

Recent Market Volatility

Market volatility was reflected across equity, currency, commodity and bond markets with the FTSE 100 falling over 10% in the days following the announcement and Brent Crude oil prices falling 15%.

Equity markets have been gradually recovering following further announcements, with the pausing of most of the US reciprocal tariffs for 90 days, however the sharp escalation in trade tensions between the US and China has continued to weigh on the rebound. Furthermore the weakening in the dollar and rise in US Government Bond yields has reflected investors search for lower risk safe havens, however there have been signs of improved stability as indications of more flexible trade agreements emerge.

Markets remain highly sensitive to this rapidly evolving situation. In the short term, elevated uncertainty is impacting on business sentiment with some businesses expected to hold off on investment decisions until there is further clarity on the path of trade discussions and how these may directly and indirectly impact economic conditions.

As discussed in Box 1, the sectors in Scotland most directly exposed to US goods trade includes food and drink, pharmaceuticals, machinery, and chemicals. Although the pharmaceuticals sector is currently exempt from the US tariffs, the US has indicated that the sector will face sector-specific tariff measures soon. However, broader impacts on growth are expected to come indirectly via weaker US and global demand and uncertainty. The immediate impact will be to slow the expected pace of economic growth in Scotland this year from reduced investment and demand.

Box 1: Geopolitical Uncertainty

Global trade tensions have escalated significantly in recent weeks following a string of announcements from the US on the imposition of import tariffs on its trading partners. A 10% minimum tariff across is now applied to most countries, with higher 25% tariffs on goods such as steel, aluminium and cars. The situation remains fluid with higher rates having been announced on a number of products and countries, before often being revised, paused, or cancelled pending ongoing bilateral negotiations.

In response to the US announcements, many countries announced retaliatory tariffs on US imports, which have now mostly been paused in response to the evolving US policy situation. However, tariffs between China and the US have increased sharply in both directions, with some goods attracting tariffs of over 100%. This evolving situation (and the uncertainty that surrounds it) has important implications for the US and global economy, including for the UK.

Tariffs impose a tax on goods that are imported from particular countries, making these goods less competitive relative to goods produced domestically or in countries not subject to the tariff.

US tariffs will have both direct and indirect effects on the UK and Scotland. Tariffs may directly decrease US demand for exports from the UK, which are now more expensive in the US market. The size of this impact will depend, among other things, on the level of tariffs (including on third countries) and the degree of trade the UK does with the US. Tariffs also create uncertainty which can dampen investment, lead to supply chain disruptions and costly reallocation of capital, leading to lower output both in the US and targeted countries – resulting in a smaller global economy.

Several institutions, such as the National Institute for Economic and Social Research (NIESR) and the Office for Budget Responsibility have undertaken initial illustrative analysis on the potential impact of various tariff scenarios. Estimated impacts on the level of UK GDP range from around -0.2% to as much as -1% over the medium term – although the exact magnitudes of these impacts are very uncertain and sensitive to the nature of any tariffs and retaliatory tariffs that are ultimately implemented in the longer term.

The majority of Scottish and UK exports to the US are in services, which may limit the direct impact compared to other countries. However, the economic impact of tariffs on the UK and globally will be felt in Scotland. The US is Scotland’s second largest export market for goods and services after the EU, and Scotland’s largest inward investor. Scottish and UK direct exposure to US trade is broadly similar, for both economies US goods exports make up around 2% of GDP.

However there are some areas of difference across export categories as classified by SITC groupings. For example, HMRC data on trade in goods for 2024 shows that Beverages are a bigger share of exports to the US for Scotland than the UK (25% vs 3%), predominantly driven by Whisky sales, while the opposite is true for Machinery and Transport equipment (32% vs 50%) with road vehicles making up 17% of all exports to the US for the UK whilst only accounting for around 2% for Scotland.

In 2024, just over 50% of Scottish goods exports to the US came from just four divisions: Beverages (including whisky), Power generating machinery, Medicinal and pharmaceutical products, and General industrial machinery.

Regardless of the sectoral differences in terms of the direct exposure that Scotland and the UK may face to US tariffs, it is likely the Scottish economy will be indirectly exposed to any spillover impacts on the rUK economy or on other key trading partners such as in the EU.

Overall, the scale and scope of the tariffs announced to date are unprecedented. In the US they are likely to result in a large shock to real incomes, while the universal nature of the tariffs (and subsequent retaliation) mean that they are also likely to act as a drag on global growth. Given the lack of clarity around the permanence of announcements and the lack of adjustment time for businesses, elevated levels of uncertainty are also expected to weigh heavily on markets, economic confidence and business investment. In aggregate it is likely that the tariffs announced (particularly with retaliatory measures), will lead to higher prices, disruption to trade flows and global supply chains, and slower global economic growth. These global impacts, as well as direct impacts on key export sectors are likely to weigh on growth in Scotland.

The impacts of recent developments on UK inflation remain uncertain and will depend on the extent to which increased tariff costs feed through global supply chains and are offset by wider factors such as weaker demand, a lower oil price and a weaker dollar. All of these factors are subject to change reflecting the scale of uncertainty in the economic outlook and the challenging landscape for fiscal and monetary policy making.

The table below focusses on the current risk profile across the range of economic outturn indictors at the start of 2025, based on their position related to historical trends (rather than looking ahead to the potential implications from increased tariffs).^[3] It illustrates the reduction in risks over the past year surrounding GDP growth, earnings growth, and aspects of prices pressures and consumer sentiment. There has been a continuation of mid to low risks in the labour market, while the risks of weaker business activity have increased, public finance risks remain high and the elevated level of geopolitical risks has now been accompanied by increased risks of world trade uncertainty.

Snapshot of Indicators

Colour coding reflects assessment of economic risk for an indicator during 2024 and 2025, relative to historic trends.

Red (R) - expected to remain weak with significant downside risks

Amber (A) - expected to remain fragile with downside risks

Green (G) - expected to remain broadly stable/fine relative to historic trends.