Scottish economic bulletin: March 2024

Overview

The first estimates of GDP for Q4 2023 show that the Scottish economy contracted in the final quarter of the year by 0.6%, although unlike the UK as a whole, it avoided falling into a technical recession over the second half of the year after growth of 0.4% in the third quarter.

That said, the latest data rounds off a subdued year of growth in which the Scottish economy grew only 0.2% over the calendar year (UK: 0.1%) and overall growth has been relatively flat since the start of 2022. Furthermore, the slow down and contraction in the final quarter of the year was broad based across the services, production and construction sectors.

After this period of weakness, economic growth is forecast to strengthen this year, albeit moderately, and the slight improvement in business activity in January has provided an encouraging start given the falls in activity in the second half of 2023. Business concerns around inflationary pressures and weak demand have converged in recent months reflecting that the challenges facing businesses are evolving as inflationary pressures continue to ease and expectations for the year ahead continue to adjust. Businesses remain optimistic for growth over the coming year and continue to retain and add to staffing levels on aggregate, which is positive.

However, the ongoing disruption to commercial shipping in the Red Sea has started to impact on UK business conditions at the start of the year, particularly manufacturers, who are reporting facing longer delivery times and increased shipping costs. The scale and persistence of the overall impact remains uncertain at this stage and will depend on how circumstances evolve over the coming months and is a downside risk for the economy.

Inflation remained at 4% in January however is forecast to fall back to the 2% target over the course of the year providing scope for interest rate cuts and strengthening consumer demand and business investment. The improvement in consumer sentiment in January is encouraging in this regard, albeit that it remains negative on balance, reflecting that households continue to be impacted by cost of living challenges.

Furthermore, the resilience in the labour market also provides a strong basis for improved growth this year with the number of payrolled employees at their highest level since the series began in 2014. The claimant count unemployment level is at its lowest since 2019 with a rate of 3.5%. Annual earnings growth has been positive in real terms since April 2023 and although the pace of growth has eased, this has contributed to provide some positive relief to households in the face of cost of living challenges. The outlook for growth remains balanced with global economic conditions improving and opportunities for Scotland in terms of external investment remaining strong. However labour supply challenges - reflecting skills and more broadly higher levels of economic inactivity – means businesses need to invest and innovate to drive productivity.