National Strategy for Economic Transformation: annual progress report June 2023

Economic Context

Economic conditions have changed significantly since the publication of the strategy. The Ukraine crisis prompted a rise in global inflation, with the increased financial pressure on households and businesses resulting in a slowdown in activity across the global economy in 2022.

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 Gross Domestic Product (GDP) estimates show the Scottish economy grew 0.4% in the first quarter of 2023, an improvement on the 0.2% in the final quarter of 2022. In the first quarter of 2023, an improvement on the 0.2% in the final quarter of 2022. . While the increase in growth is moderate overall, the recent pick-up has been evident in the Production (0.8%) and Construction (0.7%) sectors, while Service sector growth has remained more modest (0.2%). In addition, consumer-facing services have strengthened despite the ongoing challenges facing households from high inflation.

The inflation rate fell to 8.7% in April 2023 and is on a downward trend with further falls expected over the year, in particular in October 2023, 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 was 19.3% in April, still close to its highest rate since 1977, further highlighting the challenges for household budgets.

Consumer sentiment weakened in April 2023, with households becoming less confident about their household finances and spending money, although most respondents still expect the economy to strengthen over the coming year. Pressures on household finances may be beginning to ease, with recent data suggesting that pay may have begun to grow again in real terms. Pay As You Earn (PAYE) median earnings grew 0.6% on annual basis in April, reflecting nominal growth of 9.3% in nominal terms compared to inflation of 8.7%. However, the outlook for both nominal earnings growth and inflation remains very uncertain.

More broadly, Scotland’s labour market continues to perform strongly at the headline level, with unemployment at 3.1% at the turn of the year, its joint second 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. Long term sickness remains the main cause of labour inactivity.

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.