Scottish economic insights: March 2026

Overview

This edition of the Scottish Economic Insights report focuses on economic conditions across 2025 and initial indicators for 2026 and the year ahead.

Global economic conditions, already challenging over the past year with elevated geopolitical risks and trade uncertainty, have deteriorated further with the recent military conflict in the Middle East creating a logistics supply shock that has disrupted oil and gas supplies from the region with a sharp rise in oil and gas prices and upward pressure on bond yields. This has quickly translated into impacts on prices, increasing some prices for consumers, risking wider inflationary pressures, and weakening prospects for economic growth in the year ahead.

Developments in the Middle East continue to evolve at pace. At this stage, the scale and breadth of these economic impacts will depend to a large extent on the duration of military action, the disruption to oil and gas production and supply from the region and the extent to which impacts spill over into wider commodities and economic channels.

These latest developments have emerged at a time when a number of economic conditions in Scotland have stabilised and improved over the past year. Scotland’s economic growth strengthened for a second consecutive year in 2025 to 1.4% with the pace of growth slightly above forecast, albeit below the long run average. Inflation had eased with CPI falling to 3% in January, enabling the Bank of England to cut the bank rate to 3.75%, its lowest rate since the start of 2023. In its most recent meeting however, the Bank’s Monetary Policy Committee voted unanimously to hold the rate unchanged, citing the inflationary impacts of the Middle East conflict.

Despite the wider improvements in economic conditions, business and consumer conditions have remained challenging, reflected in ongoing weakness in business and consumer sentiment indicators, though they have improved at the start of the year (prior to the military conflict in the Middle East). The persistence of subdued demand and pressures on profit margins have contributed to a loosening in the labour market from a position of tightness in recent years, although unemployment remains low by historic standards at 3.9%. The number of payrolled employees has fallen over the year, albeit there has been indications of improved stability through the turn of the year, and earnings growth slowed in the final quarter of 2025 and is expected to moderate further this year.

In January, the Scottish Fiscal Commission forecast the economy to grow 1.3% in 2026 and 2027. However, the conflict in the Middle East presents increased uncertainty and risks to current conditions and this outlook, particularly if there is a prolonged disruption to oil and gas and higher prices start to feed into inflation more broadly.

We are already starting to see increases in petrol, diesel and heating oil prices. Household’s domestic energy prices more broadly are protected in the short term through the energy price cap, however further changes to fiscal and monetary policy may be required to counter inflationary pressures and support households and businesses.

This edition also presents economic insights on four important topics: The role of natural capital on the economy, measuring business sentiment, estimating alternative labour market indicators and measuring adoption rates of Artificial Intelligence in the Scottish economy.