Review Body on Doctors' and Dentists' Remuneration 2023 to 2024: Scottish evidence

C. Economic and Labour Market Conditions in Scotland

Overview

29. Economic conditions weakened over the course of 2022 as economic growth slowed amid an increase in inflationary pressures and tightening financial conditions, presenting intensifying cost of living challenges for households and businesses.

30. Labour market conditions have remained tight, with unemployment remaining at historically low levels and a persistence of elevated vacancy rates. Nominal pay annual growth rates have strengthened during the year, however pay has fallen in real terms once adjusted for inflation.

31. Looking ahead, the economic outlook is extremely challenging with forecasts estimating that the economy has already entered recession. The Scottish Fiscal Commission (SFC) estimate Scottish GDP to fall 1.8% between the start of 2022 and Q3 2023 and gradually return to its pre-recession peak at the start of 2025, while unemployment is projected to rise from its current historical low levels to peak at 4.7% in Q4 2024.

Scottish Output

32. The Scottish economy grew 0.4% in October (UK: 0.5%), however more broadly fell 0.1% over the 3-months to October on the back of a fall of 0.2% over the third quarter of 2022 and flat growth (0.0%) in the second quarter.^[7]

33. This pattern of growth is broadly consistent with the UK as a whole with latest data estimating that UK GDP grew a further 0.1% in November, though fell 0.3% over the 3-months to November.^[8]

34. Purchasing Managers Index business survey data indicate that business activity in Scotland contracted in November and December across the services and manufacturing sectors as inflows of new business/orders continued to fall over the final quarter of the year^[9]

35. Looking ahead, the SFC forecast that the Scottish economy has already entered recession and is expected to fall 1.8% over six quarters to Q3 2023, before returning to its pre-recession peak at the start of 2025. This is of a similar scale to Office for Budget Responsibility (OBR) forecast for the UK economy which estimates a peak to trough fall of 2.1% by Q3 2023^[10]

Inflation

36. Inflationary pressures intensified in 2022 as supply side challenges, particularly in energy and exacerbated by the war in Ukraine, increasingly impacted businesses and consumers with a sharp rise in consumer price inflation progressively weighing on household finances and demand.

37. For businesses, rising costs (energy, materials, staffing) are presenting challenges to business operations and resilience in the face of weakening demand. Producer Input Price Inflation was 19.2% in October, easing from its recent peak of 24.2% in June as supply side challenges have gradually eased^[11]

38. For households, the UK CPI inflation rate in November was 10.7%, easing slightly from 11.1% in October which was its highest rate since 1981. The elevated rate of inflation has been broad based but predominantly driven by rising energy prices^[12]

39. In response to the rise in inflation, the Bank of England's Monetary Policy Committee (MPC) increased the Bank Rate in December by 0.5 percentage points to 3.5% - its ninth consecutive rate rise since December 2021 and raising the Bank Rate by 3.4 percentage points over this period^[13]

40. The Bank of England forecast inflation to remain around 9-10% in the first half of 2023 before falling back towards the 2% target in 2024.

Labour Market

41. Labour market conditions remained tight in 2022 with low unemployment and high vacancy rates, however PAYE median earnings have fallen in real terms (adjusted for inflation) across the year.

42. Scotland's headline labour market statistics compare well against historical trends. In September to November 2022, Scotland's unemployment rate was 3.3%, down 0.4 percentage points over the year while Scotland's employment rate rose to 76.1% and inactivity rate fell to 21.3%.^[14]

43. While vacancy rates remain elevated, the RBS Report on Jobs indicates that recruitment activity has slowed in the fourth quarter as the uncertain economic outlook has weighed on both the demand and supply of staff^[15]

44. The SFC forecast unemployment will rise from its current historically low levels to peak at 4.7% in Q4 2024, before easing back towards its long-run trend rate of 4.1%.

45. Median nominal PAYE monthly pay has strengthened in 2022 and increased 10% over the year to November to £2,242. However, once adjusted for inflation, PAYE median earnings fell 0.6% in real terms over the year; the tenth consecutive month that median real earnings fell on an annual basis.^[16]

46. At a sector level, public sector pay growth was lower than in the private sector during 2022. Latest data for September to November 2022 at a GB level show that average weekly earnings for regular pay grew 3.3% on an annual basis in the public sector and 7.2% in the private sector.^[17]

47. The SFC forecast average nominal earnings to grow 4.4% in 2022-23, moderating to 4.1% 2023-24 and 2.5% in 2024-25. There remains significant uncertainty in the economic outlook however in the short term wage growth is forecast to remain lower than inflation