Scottish economic bulletin: April 2024

Overview

Economic sentiment and conditions improved at the start of 2024, with latest indicators providing a more encouraging start to the year, which is reflected in improved forecasts for economic growth and lower inflation in 2024 compared to 2023.

Monthly Scottish GDP grew 0.6% in January 2024 following 0.4% growth in December 2023 – albeit over the quarter remained negative at -0.1 per cent overall - indicating a modest strengthening in output growth over this period. The return to growth in services (0.4% over the quarter) is encouraging and particularly consumer facing services growth which had its highest quarterly growth rate since May 2022. However, the further falls in output in manufacturing and construction sectors over the quarter emphasise the headwinds that continue to impact across the economy.

Stronger growth in consumer facing services is reflective of improving consumer confidence. The Scottish Consumer Sentiment Indicator strengthened for a second consecutive month in February to -6.1, and although remains negative, has improved significantly over the past year as the inflation rate has fallen and the outlook for the economy and household finances have improved.

The inflation rate fell to 3.4% in February, its lowest rate since September 2021 and is forecast to fall further over the coming months, raising expectations of reductions to the Bank Rate during the year. This, alongside the continuation of low unemployment and real earnings growth should further support demand in the economy. Despite the uncertainties around the ONS’s Labour Force Survey data, other indicators of labour market activity show the number of payrolled employees in Scotland edged down marginally in February but remains close to its series high, while the claimant count unemployment level remained at 3.5%.

Latest business surveys show that business activity strengthened over January and February, albeit mainly in the services sector, supported by growth in new business orders. This has supported further improvements in business optimism for the year ahead. That said, indicators of business investment intentions remain subdued, however the outlook of strengthening demand, further stabilisation in cost pressures and the prospect of looser financial conditions could potentially unlock that to a greater degree over the year.

Looking ahead economic growth is forecast to strengthen moderately across 2024 and 2025 and latest indicators provide an encouraging start to the year with stronger business activity, consumer sentiment and ongoing resilience in the labour market. Although the drag on economic activity from higher interest rates should start to fade this year, the path for interest rates remains uncertain and will be an important determinant of the economic outlook. Downside risks to the economic outlook remain, notably from developments in the Middle East including disruption to shipping through the Red Sea.