Scottish Economic Insights: April 2025

Economic Outlook.

The recent sharp increase in global trade tensions and economic uncertainty on the back of existing weakness in business activity and consumer sentiment indicators, has had a notable impact on the near term economic outlook for 2025 and 2026 compared to forecasts made in the final quarter of 2024.

The increase in tariffs, coupled with the increase in uncertainty, is generally expected to weigh on growth through downward pressure on business and consumer activity and investment. The overall impacts on UK inflation at this stage are less clear with the feed through of higher tariffs in global supply chains, coupled with the impacts of potential supply chain disruption, likely to be offset to some extent by the recent fall in oil price, weaker dollar and weaker demand.

In December, the Scottish Fiscal Commission (SFC) forecast Scottish economic growth to strengthen in 2025 to 1.5% (up from 1.1% in 2024) and to 1.6% in 2023. The SFC will update their economic forecasts in May, however they are likely to show a more moderate outlook reflecting a similar pattern to the downward revisions to UK and global economic forecasts which have been published since then.^[31]

At a global level, in March the OECD revised down their global growth for 2025 from 3.3% to 3.1% and for 2026 from 3.3% to 3% reflecting that growth over this year and next is now expected to be weaker than in 2024 (3.4%). The downward revision to forecasts is relatively broad based across countries including the UK which the OECD forecast to grow 1.4% in 2025 (down from 1.7%) and 1.2% in 2026 (down from 1.3%). More recently, and reflecting on US tariff announcements up to 4 April, the IMF also revised down its global growth forecast for the coming years from 3.3% to 2.8% in 2025, and from 3.3% to 3.0% in 2026. For the UK, the IMF forecasts growth to be 1.1% in 2025 (down from 1.6% previously) and 1.4% in 2026 (down from 1.5% previously).^[32],[33]

The Bank of England and the Office for Budget Responsibility revised down their UK growth forecasts (in February and March respectively) for 2025 to 0.75% and 1% but revised up their forecast for 2026 to 1.5% and 1.9%. This downward revision in expectations in the short term means that the pace of growth in the UK economy is projected to be broadly unchanged in 2025 from 2024 before picking up moderately in 2026.^[34],[35]

Alongside the increase in economic uncertainty, the near term outlook for inflation has also increased from the end of last year with the Bank of England and OBR forecasting UK inflation to peak around 3.7% in 2025. Internationally, above target inflation is also expected to persist for longer than previously expected with the OECD forecasting headline inflation to moderate more gradually from 5.3% in 2024 to 3.8% in 2025 and 3.2% in 2026.

Elevated service price inflation remains a common factor holding inflation higher than previously expected, however the extent of uncertainty surrounding the introduction of tariffs and wider trade policy means there remains a significant degree of uncertainty over the inflation outlook. The Bank of England set out that the increase in geopolitical and global trade uncertainty and tariffs are a downside risk to the UK economic outlook, however the overall effect on UK inflation remains less clear and will depend on how trade policies evolve across countries and the implications for wider economic channels and exchange rates.

The combination of subdued growth and inflation gradually reducing, albeit potentially more slowly than expected last year, are reflected in market expectations that Central Banks will continue to reduce interest rates gradually over the coming year. The gradual loosening of financial conditions will help support further business and consumer activity, however there remains the risk that the benefit of more stable inflation and lower interest rates is offset by the continuation of elevated uncertainty weighing on demand.