Scottish economic bulletin: February 2025

Overview

The February 2025 edition of the Scottish Economic Bulletin reviews the latest economic data from the end of 2024 and start of 2025 during which the pace of economic growth has slowed and business and consumer surveys indicate that increased economic uncertainty and ongoing financial pressures have started to increasingly weigh on sentiment again going into the new year.

Latest data show the Scottish economy contracted 0.3% in the three months to November having weakened from stronger growth earlier in the year. Over the recent period, there was growth (0.2%) in both the Services and Construction sectors, however this was more than offset by an accelerated fall in Production output (-3.5%).

The pattern of slower growth in the second half of 2024 is consistent with the UK as a whole, however overall growth remains stronger than in 2023 with GDP growth of 1.2% over the past year (UK: 1%).

Labour market strength has been a theme in the economy over 2024, following a period of heightened labour market tightness. Latest Labour Force Survey data shows that unemployment has fallen over the past year to 3.8%. However wider labour market indicators show payrolled employment has fallen slightly in recent months, and business surveys also suggest a slight cooling in recruitment and employment intentions, in what otherwise remains a resilient labour market.

Similarly, earnings growth remains positive but has eased in the latest data, falling to 2.1% in real terms, as inflation ticked down to 2.5% in December. Cooling earnings growth is partly reflective of the ongoing cost challenges facing businesses with business surveys indicating falling levels of optimism as concerns centre around demand and taxation. It may also further support lower inflationary pressures with services price inflation, a key headwind to bringing inflation back to target, falling to its lowest rate since March 2022.

Consumer sentiment weakened back into negative territory in the latter part of 2024 amid an increase in economic uncertainty. It is encouraging however that monthly data show an improvement in December to -2.1 as sentiment improved on the economy, household finances and attitudes to spending.

Looking ahead, forecasts point towards improving levels of economic growth in 2025 with short-term stimulus from fiscal policy and as past rate cuts feed through. Downside risks to the outlook remain though, with the impact of changes to employer NICs and minimum wages on the labour market and inflation still to crystalise, uncertainty over the impact of the new US administration's trade and economic policy, and higher bond yields putting pressure on the UK's fiscal position.