Scottish economic bulletin: February 2024

Overview

This month’s bulletin updates on the latest economic data during the final quarter of 2023 and into the start of the new year. Whilst economic conditions remain challenging with economic growth weakening during the final quarter of the year, forward-looking indicators continue to provide signs that wider economic conditions are improving with inflation now expected to fall faster than was thought at the end of last year.

Latest GDP data indicates that the pace of growth slowed at the end of 2023 with output falling 0.2% in the three months to November and contracting across the months of October and November. The fall in output in the three months to November was broad based across the services, production and construction sectors with services output falling for the first time since September 2022 and as such did not offset falls in output in production and construction as it had done in recent months.

Weaker growth in the final quarter of the year is consistent with business surveys for that period indicating declining business activity and a rising share of businesses reporting weakening demand as a key concern. Business conditions more broadly have remained challenging however falling inflationary pressures over 2023 have provided a gradual easing in cost pressures for businesses and households. This is set to continue with the latest Bank of England forecasts now showing that inflation could temporarily return to the 2% target in the second quarter of the year and although it may rise again later in the year, it is still expected to remain below 3%.

The easing in inflationary pressures, coupled with market sentiment that interest rates have peaked and are now expected to fall, has improved business and consumer sentiment. The Scottish Consumer Sentiment Indicator rose to -5.1 in the final quarter of the year, its highest level since the start of 2022 however falls in sentiment across the months of November and December 2023 continue to emphasise the underlying challenges and uncertainty facing households.

Improving sentiment has also been underpinned by the resilience in the labour market with unemployment remaining extremely low below 4% while we continue to see the return to real terms earnings growth.

Looking ahead economic conditions are forecast to improve in 2024 and 2025 with GDP growth forecast to pick up moderately to 0.7% and inflation to fall below 3%. Growth could surprise on the upside given falling inflation and interest rate expectations are supporting improved business and consumer sentiment.

However the events in the Red Sea present a new risk to the outlook and has the potential to impact business conditions through supply chain disruption and increased costs over the coming year. They further emphasise the uncertainty that remains in the economic outlook and that external geo-political factors remain important and have the potential to influence economic conditions.