Scottish economic bulletin: December 2023

Overview

This month’s bulletin updates on the latest economic data which provide further emerging insights into the final quarter of the year. This follows the recent Scottish Government budget, and the updated official outlook for the Scottish economy published by the Scottish Fiscal Commission (SFC). The budget continues to support investment in public services, in part funded by tax increases on higher earners, which the Commission has judged not to be economy moving.

Latest data show Scotland’s GDP grew 0.2% in the three months to October, down from 0.4% in the three months to September. This reflected a sharp fall in output of 0.5% during the month of October (-0.3% across the UK as a whole) with anecdotal evidence indicating that the winter storms and exceptionally wet weather during the month impacted on business activity across sectors.

Over the three months to October, growth was driven by the services sector (0.1%) and production sector (1.4%) offsetting a fall in construction sector output (-0.4%). Within the production sector, manufacturing output continued its downward trend, falling 1.4% in the three months to October and has now fallen 5.6% over the past year. In the services sector, consumer facing services grew 0.2%, with growth across hospitality and recreational activities, while retail output continued to contract.

Business conditions remain challenging, however falling inflationary pressures over 2023 (including input costs) is providing a welcome albeit gradual easing in cost pressures for businesses and households. Cost pressures related to wage and energy costs remain key concerns for business, alongside weakening new orders as interest rates continue to squeeze demand and spending in the economy. That said, business optimism for output growth over the year ahead has remained resilient, partly reflected in businesses continuing to add to their staffing levels, though economic uncertainty is continuing to impact on wider business investment intentions.

Latest consumer sentiment data for November shows a slight fall over the month and remains in negative territory. However, sentiment has improved significantly over the past year as inflationary pressures have gradually eased, unemployment has remained low and earnings growth has remained robust with average earnings in Scotland forecast to grow faster than the UK over 2023-24. Despite this, households continue to report challenges relating to mortgage and energy bills and more broadly are less relaxed about spending money in these circumstances.

Looking ahead, the SFC forecast GDP growth to remain relatively subdued over 2024 and 2025 with growth of 0.7% and 1.1%. This reflects their view that both inflation and interest rates are expected to remain higher for longer than previously forecast. That said, the resilience of business optimism for the coming year, increased expectations that interest rates may have peaked, the tight labour market with increased earnings growth, improved consumer sentiment, alongside the opportunities for investment in Scotland, provide a strengthening basis for an improving growth outturn in 2024.