Monthly economic brief: April 2023

Overview

The start of 2023 has seen a slight improvement in economic activity and optimism compared to the second half of 2022 during which economic output remained broadly flat and inflation rose to its highest rate since 1981. However, economic conditions are extremely challenging and the outlook for the year ahead remains subdued.

Latest GDP estimates show the Scottish economy grew 0.4% over the three months to February with the pace of growth strengthening in recent months to its highest rate since May last year. While the increase in growth is moderate overall, the recent pick-up has been most evident in the Production (0.9%) and Construction (1.1%) sectors while Service sector growth has remained more modest (0.2%). That said, consumer facing services growth (1.4%), has strengthened despite the ongoing challenges facing households from high inflation.

The inflation rate fell to 10.1% in March and is on a downward trend with further falls expected over the year, in particular in April and October, as the impacts of the rise in the energy prices cap over 2022 fall out of the headline rate. The recent easing in inflation has been driven by a fall in motor fuel prices, however this has been partly offset by a further surge in food price inflation which rose to 19.6% in March, its highest rate since 1977, further highlighting the challenges for household budgets.

Consumer sentiment strengthened for a fifth consecutive month in March to its highest level since July last year with respondents expecting the economy to strengthen over the coming year. However, households remain notably less optimistic about the outlook for their household financial security which is reflected in ongoing concerns about spending money. Furthermore, PAYE median earnings fell 1.8% on annual basis in March, despite growing 8.1% in nominal terms, emphasising that pay continues to lag behind inflation.

More broadly, Scotland's labour market continues to perform strongly at the headline level, with unemployment falling to 3.0% at the turn of the year, its lowest rate on record. Tightness in the labour market is persisting, however recruitment activity has continued to slow and in part reflects the ongoing economic uncertainty facing businesses for the year ahead.

Cost challenges remain a key part of that concern as businesses face higher energy and staffing costs in the face of an outlook of subdued demand for the year. Like other key indicators, business confidence has improved in recent months following a drop during the second half of last year, reflecting that while conditions are challenging, there is a greater degree of resilience than previously forecast and the economy is progressing through this current downturn.

The forecast of weaker global growth presents an ongoing headwind, particularly in the face of higher interest rates, however the fall in inflationary pressures forecast for this year should further strengthen sentiment and prospects for growth.