Scottish economic bulletin: October 2023

Overview

This month's bulletin provides an update on economic indicators during the third quarter of 2023 in which inflationary pressures have continued to ease however the economy remains in a period of subdued growth, labour market conditions have softened and business and consumer sentiment have moderated.

Furthermore, in line with recommendations from the New Deal for Business Group on metrics, this refreshed publication provides further evidence on latest business conditions to improve understanding of the business climate.

The Scottish economy grew 0.1% in July, although more broadly it contracted 0.1% over the three months to July, continuing a period of subdued growth in which output has remained broadly flat since the start of 2022. PMI data for August indicate a further slowing in new business orders suggesting that this period of weak growth is set to continue through the quarter.

This period of weaker growth is in line with forecast, with above target inflation and higher interest rates weighing on economic activity. Although inflation is coming down and fell to 6.7% in August, it's forecast to remain above the 2% target through 2024. The decision to maintain the Bank Rate at 5.25% in September, after fourteen consecutive rate rises, highlights the Bank's judgement that rates are now restricting the economy with the effect of previous rises yet to be fully felt.

Despite challenging conditions, Scotland's labour market has remained particularly resilient, although latest data indicates the labour market has softened slightly with unemployment rising to 4.3%. This latest rise has been driven by a reduction in inactivity rather than a fall in employment. That said, recruitment activity has slowed as both the demand for and availability of staff has softened in the face weaker expectations for growth over the coming months.

Business conditions more broadly are challenging with cost pressures remaining the main concern. The recent fall in overall Producer Input Prices will provide a welcome easing in some inflationary pressures for some producers, however business surveys indicate that wage costs have become a key cost pressure for firms while businesses are also increasingly concerned about higher interest rates and weakening demand.

Consumers also continue to face challenging conditions with recent improvements in consumer sentiment over the past year moderating in recent months in the face of inflationary pressures and higher interest rates. Real median PAYE earnings have returned to positive growth recently however households continue to report challenges paying mortgage and energy bills and more broadly are not relaxed about spending money.

Looking ahead, the weakness in optimism across consumers and businesses emphasises the ongoing uncertainty in the economic outlook and the risks to growth over the remainder of the year.