Scottish economic insights: October 2024

Overview

This edition of Scottish Economic Insights provides analysis of recent economic conditions and labour market trends in Scotland, longer term challenges in productivity, investment and competitiveness and the economic outlook.

The economy has undergone a reset since the start of 2022 following Covid and more recently the inflation shock which has placed significant strain on household finances, with economic growth remaining largely flat across 2022 to 2023.

The first half of 2024 has seen an improvement across a range of key economic indicators. GDP growth has strengthened modestly while inflation has eased back towards its target rate. This has been accompanied by further growth in business activity, positive real earnings growth and consumer sentiment moving back into positive territory for the first time since the start of 2022.

The improvement is modest and in terms of growth has largely been driven by the services sector while production and construction output has been relatively weak. The recent weakening in consumer sentiment in August highlights the importance of confidence and expectations regarding economic prospects and demand in the economy, albeit that high employment levels continue to provide a resilient backdrop.

This edition of Scottish Economic Insights presents differences in GDP growth by sector over the past year. It also considers consumer sentiment in more detail, disaggregating the headline consumer sentiment indicators by age and gender for the first time.

The outlook for growth and inflation is significantly more stable than it has been in recent years. This presents a strengthening foundation for further consumption growth, which coupled with loosening monetary policy presents an improving basis for business investment and for addressing longer term challenges of weakness in productivity growth.

However, some businesses continue to report challenges in recruiting key staff, which alongside ongoing wage cost pressures and the risk of weakening demand mean that although business conditions have improved, they remain challenging.

Furthermore, the risks and uncertainty in the global economic outlook remain challenging to navigate. While there is a clearer picture of the outlook for monetary policy and the effects of the pandemic and cost of living shocks continue to fade, there are challenging headwinds from the ongoing uncertainty in the Middle East and the risks to supply chains and oil prices, alongside the outlook for slower growth in the US and China over the coming year.

Lastly, the Scottish economy has strengthened in 2024 as forecast, however the challenging fiscal outlook and its impacts on investment, output and confidence at both a Scottish and UK level, will be a key consideration in the final quarter of the year.