Monthly economic brief: December 2022

Overview

This month's economic brief provides an update on some of the latest economic data during the third and fourth quarters of the year with forecasts indicating that the UK economy has now entered recession as inflation has continued to rise and financial conditions worsen.

Scotland's GDP fell 0.2% in the third quarter of the year, in line with the UK as a whole, following flat growth in the second quarter. The extra bank holiday in September impacted output, however, flat growth in the services sector across the quarter, in part driven by a fall in consumer facing services, indicates that the increasing cost of living is negatively impacting spending in the economy.

The falls in output was relatively broad based over the quarter, with falling output in the production and construction sectors and indications that supply side challenges are also continuing to impact on activity, albeit to a slightly lesser degree than earlier in the year. Business surveys indicate further contractions in business activity in the fourth quarter as businesses continue to face weakening demand while responding to the challenges of rising costs.

Businesses are continuing to adopt a range of measures in response to higher cost pressures, with most reporting to absorb costs, followed by passing on higher prices to customers, and some taking other measures to reduce costs such as changing suppliers or decreasing staff work hours. Energy costs continue to be the main concern for businesses, however broader inflationary pressures, supply chain disruption and interest rates are also concerns.

Median real earnings fell by 5% in the year to October as inflation rose to 11.1%. Further increases in energy and food prices, which alongside rising interest rates, are significantly impacting household budgets. Consumer sentiment in Scotland has fallen to its lowest level since the start of the time series in 2013, reflecting the significant concerns that households currently have for the economy, household finances and spending.

Unemployment increased slightly over the third quarter to 3.5%, however remains low overall and labour market conditions remain tight with many businesses continuing to report shortages. However there are indications that the overall pace of recruitment activity has slowed, partly reflecting that demand for staff has become increasingly tentative given the level of uncertainty in the economic outlook.

Looking ahead, forecasts expect that the fall in output in the third quarter marked the start of a UK recession with output expected to continue falling in 2023 as persistent, though slowing, inflation and tightening financial conditions result in falling real household income and demand. However there remains a great deal of uncertainty over the depth and duration of this economic downturn due to the complexity of both current domestic and global factors. The Scottish Fiscal Commission will publish their latest forecasts for Scotland on 15 December alongside the Scottish budget.