Scottish Economic Bulletin July 2024

Overview

Economic conditions across a range of indicators have continued to improve in the first half of 2024 and are indicative of the improving economic outlook of moderately strengthening growth and lower, more stable inflation than in recent years.

GDP grew 0.9% in the three months to May with the pace of growth strengthening from the start of the year to its highest 3-monthly rate since April 2022. Recent growth continues to be driven by the services sector and to a lesser extent production, offsetting falling construction output. This pattern has also been evident in the Growth Tracker business survey for June, which indicated a sixth consecutive month of strengthening business activity in Scotland’s private sector, albeit the pace of growth was slower than in recent months.

Inflation fell to its target rate of 2 per cent over May and June and although underlying inflation remains higher, it has been on a downward trend. However, inflation in the services sector remains higher than the headline rate, highlighting the risks to both underlying inflation and the future path of interest rate reductions. Nonetheless, the Bank of England’s decision to reduce the Bank Rate from 5.25% to 5% is a positive step and will improve economic sentiment as borrowing costs ease.

Scotland’s labour market continues to remain resilient. The number of PAYE employees in June rose to its highest level (2.47 million) since the start of the timeseries in 2014 and whilst the claimant count unemployment rate increased slightly in June to 3.8% it has remained broadly stable over the past year. Declining inflation also means that earnings are continuing to grow in real terms, with median earnings growing 3.2% over the year to June, with growth sustained across the entire year.

This resilience in the labour market is also reflected in the latest Consumer Sentiment Indicator, which strengthened by 8.5 points over the second quarter and returned to positive territory for the first time in over two years. This reflects an improvement in households’ current circumstances compared to last year and their expectations for the economy and their household finances in the year ahead. However, households remain concerned about their financial security and spending with the risk that this leads to weakening demand in the economy, which remains a key concern for businesses.

Overall, the recent improvement in economic conditions is promising, however it is still modest at this stage of recovery and reflects in part a cyclical upturn in economic confidence and demand following the cost of living shock. The latest data do suggest however that economic growth in Scotland could be stronger than independent forecasts for 2024. Despite this, household incomes have not fully recovered from the cost of living shock, with living standards forecast to remain below 2021-22 levels for another two years.