Scottish Economic Insights: April 2025

Economic Growth Picked Up in January, but Business and Consumer Surveys Indicate Sharper Downside Risks.

Economic Growth

Scotland’s economy grew 1.1% in 2024, picking up from slower growth of 0.5% in 2023. The increase across the calendar year reflected a year of two halves, in which output rose at a faster rate in the first half of 2024 (1.3%) before growth slowed in the second half of the year to 0.4%, during which economic output remained broadly flat in the fourth quarter.^[4]

This pattern of growth across 2024 was reflected in the UK as a whole, however latest data for the start of 2025 indicates that economic growth picked up at the start of the year, growing by 0.3% in January and more broadly by 0.5% in the three months to January.

Across the calendar year of 2024, Scotland’s GDP growth was driven by the Services sector (1.6%) which offset falls in economic output in the Production sector (-0.9%) and the Construction sector (‑0.1%). The pattern of growth across the two halves of the year was relatively broad based across the Services and Production sectors. Consumer Facing Services growth remained positive across the year but slowed moderately from 1.8% to 1.1% in the second half of the year, while Manufacturing output grew 2.4% in the first half but fell 1.5% in the second half of the year.

In contrast, Construction output growth strengthened in the second half of the year to 1.1% (following a fall of 0.6% in the first half).

Latest data for the three months to January indicated broad based growth through the turn of the year with moderate growth in the Services (0.3%) and Construction (0.3%) sectors and a notable rebound in growth in the Production sector (1.6%) driven partly by a pick-up in Manufacturing output (0.5%).

Business Surveys

Stronger growth through the turn of the year followed flat growth in the fourth quarter of 2024 and amid increased economic uncertainty that developed domestically and internationally through the fourth quarter of the year. However, wider business and consumer indicators suggest that economic activity has weakened over the past six months and has been further impacted following the US tariff announcements at the start of April.

For example, RBS Growth Tracker data indicates that following accelerated growth in the first half of 2024, business activity slowed and fell into contraction at the end of the year. The indicator reading of 45.9 in March was the lowest since the start of 2023 (<50 suggests contraction). This was partly driven by weakening new business orders in the second half of 2024 and which have been falling at an accelerated pace through the first quarter of 2025.^[5]

Weakening new orders over the past two quarters has been accompanied by indications that businesses have been slightly reducing their staffing numbers and are notably less optimistic for growth over the coming year, albeit that optimism picked up slightly at the start of the year.

Business Insights and Conditions Survey data show that over the past six months, the share of businesses expecting their performance to decrease over the next 12 months has increased from 6% to 12%.^[6]

Businesses’ main concerns have also evolved across 2024 with concerns around energy prices and inflation being overtaken by concerns around falling demand for goods and services and most recently by taxation following the UK Budget in October and the announcement of increased employer National Insurance Contributions. In April, 18% of businesses reported taxation as a main business concern followed by falling demand for goods and services (13.8%).

Business concerns around taxation are part of broader cost challenges that businesses have reported at the start of 2025. The RBS Growth Tracker indicates that input prices faced by Scottish businesses picked up towards the end of 2024 and have accelerated through the first quarter of 2025 with the input price index rising to its highest level since the middle of 2023. Faced with a further squeeze on profit margins, BICS data indicates there has been a sharp increase (from 24% to 38%) in the share of businesses expecting to raise their prices in April.

Among businesses considering price increases, labour costs have been increasingly cited as the main driver. Of those considering raising prices in April, 56% reported labour costs as the main factor, up from 44% in March and continued the upward trend since October 2024.

The Fraser of Allander Institute’s Scottish Business Monitor for Q1 2025 reported that 78% of businesses have seen increased payroll costs as a result of the employers’ NICS increases, with 49% having passed on costs to customers and a further 47% reporting that they have lowered their recruitment intentions.^[7]

Similarly, the latest Scottish Chambers of Commerce Quarterly Economic Indicator for Q1 2025 indicates that business confidence has fallen over the year, with taxation being the most widely reported concern for businesses and labour costs being the leading cost pressure for business operations. The full impact of increased employers’ NICS and labour costs on businesses and consumer prices will continue to emerge over the coming months.^[8]

Box 2: Developing a Scottish Business Sentiment Index: A Real-Time Indicator of Business Confidence

As part of its work to improve understanding of the challenges facing business, the Scottish Government has been developing a new Scottish Business Sentiment Index (BSI) designed to measure business confidence in Scotland in real time.^[9] By systematically analysing business-related media coverage, the BSI aims to deliver up-to-date insights into economic conditions, enabling policymakers, businesses, and analysts to track trends, anticipate risks, and make evidence-based decisions.^[10]

Construction and interpretation of the index

Unlike traditional survey-based measures, the BSI applies machine learning and sentiment analysis to business news articles. It is constructed using data from Factiva, a news database. Corporate and Industrial News articles tagged as relevant to Scotland are processed using linguistic analysis and machine learning techniques and assigned a score. An increase in the score indicates improving business confidence. A decline in the score signals deteriorating sentiment. Figure 2 is a stylised figure on how to interpret changes in the Business Sentiment Index compared to the previous period.

Validation

To assess the validity of the BSIs and their relationship with key aspects of the economy, Table 1 provides a condensed summary of the key relationships found between the BSI and other economic indicators. Overall, the evidence suggests that the BSI is a robust leading indicator of GDP and employment trends, while its relationship with uncertainty indices varies over time. These insights highlight the BSI's potential utility for forecasting economic conditions.

Table 1: Summary of BSI links with key economic indicators

Indicator: CSI (Consumer Sentiment Index)

Correlation with BSI: Positive (0.6)

Key Insight: Moves in sync with business sentiment, but lags behind during economic shifts.

Indicator: Macroeconomic Indicators (GDP, Employment)

Correlation with BSI: Positive (0.6 & 0.55)

Key Insight: BSI correlates and tends to precede GDP or employment, acting as a leading indicator for economic trends.

Indicator: Economic Policy Uncertainty (EPU)

Correlation with BSI: Near-zero (pre-2015), negative (post-2015)

Key Insight: Increased uncertainty moves opposite to BSI, especially after events like Brexit.

Indicator: Sector Sentiments

Correlation with BSI: Varies by sector

Key Insight: Certain sectors, e.g. whisky and oil, react more strongly to global events and market shifts.

Indicator: Government Policy

Correlation with BSI: Positive links

Key Insight: Government decisions (e.g. fiscal or regulatory) directly affect business sentiment.

Figure 3 shows the BSI over time. The index tracks economic cycles, declining during major economic disruptions, such as the Global Financial Crisis (2008-2009), Brexit (2016-2020), and COVID-19 (2020-2021).

The figure plots the monthly frequency of the overall Scottish Business Sentiment Index constructed by the authors using Factiva data against various key global, UK and Scottish events.

Future Development and Policy Use

As a real time indicator, the BSI can be regularly updated. It will complement other leading economic indicators such as the Consumer Sentiment Index. Work will continue to develop the indicator, with potential developments including:

• Regional sentiment analysis to capture differences across Scotland.
• Industrial analysis to assess sector-specific sentiment trends.
• Integration with other economic indicators to enhance forecasting models.

The BSI provides a forward-looking perspective on economic trends, bridging the gap between academic research and practical policymaking. It provides a real-time economic signal, supporting policy decisions in response to business sentiment shifts. For business, it can provide benchmarking tools to support investment planning, hiring decisions, and risk assessment.

The Scottish BSI is an innovative new approach to economic monitoring, highlighting how new AI approaches can be used to offer a timely and data-driven measure of business confidence. By capturing real-time sentiment trends, the BSI serves as a valuable tool for government, businesses, and analysts, strengthening Scotland’s resilience and competitiveness in a rapidly evolving economic landscape.

Consumer Sentiment

Similar to the pattern of GDP and business activity indicators, consumer sentiment strengthened across the first half of 2024, peaking at 5.5 in July before weakening sharply in the second half of the year and in February 2025 remained subdued at -5.7.

The decline in sentiment in the second half of 2024 was mainly driven by the current and expected economic performance indicators, with the indicators on household finances and spending falling to a lesser extent. Most recently in February 2025, sentiment on the economy picked up slightly while sentiment on household finances weakened further and is broadly consistent with the pattern at a UK level.^[11],[12]

The latest quarterly data for Q4 2024 continues to show that sentiment is varied across different demographic characteristics. Younger respondents, males, respondents from higher socioeconomic groups and those in central Scotland reported higher levels of sentiment than their counterparts.

Looking across at respondents by age group, younger respondents, and those under 44 continue, on balance, to report higher levels of sentiment than respondents over age 44, while the fall in consumer sentiment during 2024 was sharpest among those aged 64+.

Consumer Prices

CPI inflation stabilised around the 2% target temporarily during 2024 supported by falling goods prices and a gradual fall in services price inflation which has remained more elevated. Inflation has picked-up above target over the past six months, with some month-to-month volatility driven by base effects continuing to work through the annual data, and was at 2.6% in March.^[13]

Over the past year to March, electricity, gas and other fuel prices have fallen by 10.1%, despite rising in the second half of 2024, while transport services price have risen by 3.9% and food prices by 2.9%. The movement in energy price inflation partly reflects changes in the Energy Prices Cap which rose 1.2% over the quarter to £1,738 in January to March (down 9.9% annually) and has risen another 6.4% over the quarter to £1,849 in April to June.^[14]

In line with more stable inflationary pressures, the Bank of England lowered interest rates twice in the second half of 2024 from 5.25% to 4.75%, and for a third time in February 2025 to 4.5% (remaining unchanged in March).^[15] The gradual approach to loosening its monetary policy position reflects the easing inflationary pressures in the economy but also the continued upside risks to the inflation particularly in services prices.

The reductions in Bank Rate during 2024 and start of 2025 are continuing to feed through the wider economy and borrowing rates for businesses and households. The effective interest rate on new mortgages has fallen from 5.19% during 2024 to its current rate of 4.53%, while the average interest rate on the total stock of mortgages has risen steadily from 3.41% to its current rate of 3.87%, reflecting the ongoing process of households gradually coming off fixed rate mortgage products arranged before the rise in interest rates in 2022.