Monthly economic brief: February 2023

Overview

This month's economic brief provides an update on the latest economic data in the final quarter of 2022 and the latest forecasts for the year ahead.

Globally, economic conditions in the final quarter of 2022 weakened significantly as pressures on household finances and falling business confidence impacted consumer spending and investment. The recent falls in energy prices from their peaks in 2022 offered some optimism that although economic conditions remain difficult, most advanced economies are likely to avoid recession in 2023 as inflationary pressures ease, though economic conditions remain tough.

Growth in the Scottish economy stalled during the second half of 2022 with latest data showing flat growth in the three months to November. Growth in the UK is similarly weak, with GDP falling 0.3% over the same period. PMI business survey data indicated that a further fall in business activity in December is expected, however this is not surprising given the cost challenges that are continuing to impact households and businesses. Relative to the independent forecasts for this period, output has not fallen by as much.

At a sector level in Scotland, the weakness in growth has been seen in the large Services sector, falling 0.1% over the latest three months, and Construction falling 0.2%. This has been offset by Production growth (0.6%), driven by growth in the electricity and gas supply industry.

The headline inflation rate fell to 10.5% in December, down slightly from its recent high of 11.1% in October and indicates that overall inflation may have peaked; however, underlying core inflation remained unchanged, suggesting that price pressures will remain for some time. Prices also continue to rise for some goods and services, such as food where inflation was 16.8%, emphasising the challenges that households continue to face for essential items. Scottish consumer sentiment reflected this, falling to a series low in the fourth quarter.

Businesses likewise continue to see input cost rises with annual producer price inflation of 16.5% in December, although the pace of inflation has slowed in recent months. Energy costs continue to be the main concern for businesses, however staffing costs are a rising cost consideration.

The increase in nominal wage settlements in part reflects the ongoing tightness in the labour market in which unemployment remains at historically low levels and upward pressure on salaries reflects ongoing shortages of staff and the need to retain staff. However, recruitment activity has slowed amid the uncertainty of the economic outlook.

Looking ahead, the economy is now expected to enter recession during 2023 rather than the second half of 2022. The recent Bank of England forecast for the UK suggests a shallower fall in output in 2023 and inflation may fall faster reaching 4 per cent by the end of the year. Although this is more positive, with interest rates rising to 4 per cent in February, this will continue to be a difficult year for households and businesses – particularly those in consumer-facing sectors.

Finally, the trend growth estimates for the UK, which reflect the underlying capacity of the economy to grow without generating inflation, continue to be reduced, reflecting weak investment and productivity growth.