Scottish economic insights: November 2023

Economic Risks

Economic risks have evolved over the past year as the economy has continued to recover from the legacy effects of the pandemic while progressing through the inflation shock, with conditions improving in some areas while remaining acutely challenging in others.

The risks to the economic outlook and the implications for businesses and consumers, the labour market and more widely are captured in the table below.^[1] This sets out a range of economic indicators through which emerging economic risks are being monitored. Red risks are expected to remain weak with significant downside risks, amber risks are expected to remain fragile with downside risks, and green risks are expected to remain broadly stable/fine relatives to historical trends.

The red risks are around economic growth, business activity and consumer sentiment, reflecting that economic growth has been broadly flat since the start of 2022 with indications of weakening business activity going into the fourth quarter of the year. Weakness in consumer sentiment indicators also emphasises the persistent cost of living challenges that are impacting households and the significant downside risks to consumption growth in the near term. Geopolitical risk is a further downside risk.

Amber risks include risks related to prices which have slightly reduced over the past year as the inflation rate has eased back from its peak, however they very much remain amber reflecting the fragility of the improvements observed in inflation and the downside risks that remain. The easing in inflationary pressures have also fed through to improvements in earnings growth indicators which have returned to positive real terms growth in recent months, though also remain fragile on the back of such a sharp negative impact over the previous year.

Green risks include labour market indicators. At a headline level, risks remain lowest in the labour market with low unemployment and high employment continuing to indicate the resilience of the labour market through this challenging period. However, the slight slowing in recruitment activity over the course of 2023 presents amber risks within the labour market and a greater degree of fragility than earlier in the year.