Economic Conditions in Scotland and Outlook for 2025
Economic Structure & Performance
Scotland operates as a small, open, and advanced economy, deeply integrated with the UK economy, which influences various economic activities and policies.
Its economic performance closely mirrors the UK average and is competitive with other OECD countries, consistently ranking in the second quartile for output per capita, reflecting a stable yet not leading position.
Total exports approximate £80 billion, a significant contributor to the economy, divided between £49 billion to the rest of the UK (RUK) and £31 billion to the rest of the world (ROW), showcasing a balanced trade relationship.
Scotland's average economic growth has slowed since the 2007/08 financial crisis, indicating long-term impacts from global economic events. However, the economy has demonstrated resilience amid various challenges, including the financial crisis, oil price shocks, Brexit, the COVID-19 pandemic, and the cost of living crisis.
The economy's structure has undergone significant changes over the past 50 years and continues to evolve, adapting to global and local economic pressures.
The total value of the onshore economy is approximately £201 billion, highlighting the substantial economic activity within Scotland.
The service sector is dominant, accounting for 78% of the total output, with international exports heavily concentrated in key sectors such as financial services and tourism.
The offshore economy, primarily driven by oil and gas, contributes around £20 billion to the output and provides crucial support to the onshore economy through employment and investment.
Scotland's natural assets and brand reputation are vital for current international exports and create future opportunities in sectors like food and drink (e.g., whisky), financial services, tourism, energy (including renewables), digital technologies, and tech industries.
Competitiveness is essential for sustaining economic performance, reflecting the overall health of the economy and necessitating a comprehensive approach that includes improving productivity, innovation, and skills development. Population and labor supply demographics are particularly important for Scotland, influencing workforce availability and productivity.
Structural Change in the Economy: Drivers and Areas of Impact
Elements of Change:
External Shocks: Economic, political, and social events such as global recessions, trade wars, and political instability.
Technological/Innovation: Digital advancements, AI, new discoveries, and innovation driving productivity and creating new industries.
Macro/Regulatory & Legal: Monetary and fiscal policies, legal and regulatory operating environment influencing investment and business operations.
Behavioral Change: Paradigm shifts involving adoption and acceptance of new norms and practices affecting consumer behavior and business strategies.
Recent shocks/drivers:
Financial Crisis: The global financial crisis of 2008 had lasting effects on Scotland's banking sector and overall economic stability.
EU exit: Brexit has led to changes in trade relationships, impacting specific sectors and requiring adjustments in economic strategies.
Pandemic: The COVID-19 pandemic caused significant disruptions to various sectors, including tourism, hospitality, and retail, necessitating government support and adaptation.
Cost of Living: Rising cost of living affects consumer spending and business operations, requiring policy responses to mitigate the impact on households and businesses.
Geo-Political uncertainty: Global political instability and conflicts create uncertainty, impacting investment decisions and trade flows.
Channels:
Demand: Changes in consumer and business demand affect production levels and overall economic activity.
Supply: Disruptions in supply chains and availability of resources impact production costs and business operations.
Exchange rates: Fluctuations in exchange rates affect the competitiveness of exports and the cost of imports.
Borrowing costs: Interest rates and borrowing costs influence investment decisions and consumer spending.
Technological Innovation: Advances in technology affect productivity, create new industries, and transform business models.
Macro/Fiscal: Government spending and taxation policies impact economic activity and investment.
Social: Social trends and demographic changes influence labor markets and consumer behavior.
Structural: Changes in the structure of the economy, such as the decline of traditional industries, require adjustments in workforce skills and economic policies.
Regulatory: Regulations and legal frameworks impact business operations and investment decisions.
Legal: Changes in laws and legal frameworks affect property rights, contracts, and business practices.
Political: Political stability and policy decisions influence investment, trade, and economic growth.
Amplifiers of Impact
Resilience Levels: The ability of the economy to withstand and recover from shocks influences the overall impact.
Tipping Points/Norms: Changes in societal norms and critical thresholds can amplify the effects of economic events.
Speed of Adoption: The rate at which new technologies and practices are adopted affects productivity and competitiveness.
Mitigating Policies
Fiscal Support: Government spending and financial assistance can cushion the impact of economic downturns.
Transition Plans: Strategies to help businesses and workers adapt to structural changes in the economy.
Investment: Strategic investments in infrastructure, technology, and education can promote long-term economic growth.
Stability: Policies aimed at maintaining economic stability and reducing uncertainty.
Impact on:
Monetary policy: Central bank actions to control inflation and manage interest rates.
Fiscal policy: Government decisions on taxation and spending to influence economic activity.
Wellbeing: Economic conditions affect the overall quality of life and happiness of the population.
Participation: The level of involvement in the labor force and other economic activities.
Productivity: Efficiency in production and the output per worker.
Quality of Life: Factors affecting the standard of living, including health, education, and environmental quality.
Evolution of the Scottish Economy
The Scottish economy has significantly evolved over the past 50 years, transitioning to a largely service-based economy, with a decline in traditional industries such as manufacturing and coal mining and a rise in sectors like finance, tourism, and technology.
In 2023:
Scotland’s onshore GDP is estimated at £201 billion or £36,600 per person, reflecting the total value of goods and services produced within Scotland.
Including oil and gas extraction, Scotland’s GDP is estimated at £219 billion or £39,900 per person, incorporating the economic contribution of the offshore oil and gas industry.
This accounts for approximately 8% of the UK's GDP, indicating Scotland's share of the overall UK economy.
Current Economic Conditions
The current economic conditions have been shaped by a succession of economic shocks in recent years, including the COVID-19 pandemic, Brexit, and global economic uncertainty, affecting various sectors and economic indicators.
Scotland’s GDP per Head
Scotland’s GDP per head (onshore economy) is in the third quartile of OECD countries, indicating a moderate level of economic output per person compared to other developed nations.
It is in the second quartile when including a geographical share of extra-regio, which includes offshore activities like oil and gas extraction, boosting its overall economic performance.
Economic Growth in 2024
Economic growth strengthened in 2024, but the pace slowed in the latter part of the year due to increased economic uncertainty both domestically and internationally, reflecting the impact of global events on local economic activity.
Scotland’s GDP fell by 0.3% in the three months to November (UK: 0.0%), but more broadly grew by 1.2% (UK: 1%) over the year as a whole, indicating a mixed economic performance with short-term declines offset by overall annual growth.
The recent fall in output was driven by a fall in Production (-3.5%) output, partially offset by further positive growth in the Services (0.2%) and Construction (0.2%) sectors, highlighting the shifting dynamics between different sectors of the economy.
However, the pace of growth in these latter two sectors has eased from earlier in 2024, suggesting a moderation in economic expansion.
Services growth was strongest in Professional, Scientific, and Technical services (2.4%), indicating robust activity in these sectors.
Consumer-facing services continued to grow (0.2%), albeit to a lesser extent than earlier in the year, as output fell in wholesale, retail, and motor trades (-0.1%) and was flat in Accommodation and Food Services (0.0%), reflecting changing consumer behavior and spending patterns.
Inflation Rate
The inflation rate fell to 2.5% in December (from 2.6% the previous month), moving closer to the central bank's target.
The recent fall was mainly driven by lower inflation in restaurants and hotels and falling transport prices, specifically reducing pressures in consumer-facing sectors.
Services price inflation fell from 5% to 4.4%, its lowest rate since March 2022, indicating a cooling in the service sector, while goods prices rose 0.7% in December, following a period of deflation earlier in 2024, showing a shift from decreasing to increasing prices in goods.
Core inflation, which excludes energy, food, alcohol, and tobacco, fell to 3.2% in December (from 3.5%), giving a clearer picture of underlying inflationary pressures.
The rate of inflation has fallen to near its 2% target; however, overall consumer prices are 18% higher than at the start of 2022, reflecting the scale of price adjustment since then, meaning that while inflation is decreasing, prices remain significantly higher than pre-inflation surge.
Inflation is forecast to increase to 3.7% in 2025, with the Bank of England expecting this to be driven by an increase in energy prices and regulated prices such as water charges, while employer NICs is also expected to add to inflation, indicating potential future upward pressure on prices.
Bank of England Rate
On February 6th, the Bank of England reduced the Bank Rate to 4.5% (its lowest rate since May 2023), reflecting that inflationary pressures have eased, signaling a response to improved economic conditions.
This rate decision comes after the Bank rate was reduced to 5% and 4.75% in August and November 2024, respectively, from its recent peak of 5.25%, indicating a gradual loosening of monetary policy.
The MPC’s decision follows the European Central Bank (ECB) reducing their policy rate in January, while the US Federal Reserve maintained their Bank Rate, reflecting a global trend towards adjusting monetary policies.
Markets currently expect interest rates to continue to fall gradually this year, although there remains significant uncertainty domestically and internationally, forecasting potential future reductions but acknowledging economic volatility.
Central banks are gradually loosening monetary policy internationally as inflation has eased relative to previous years, promoting economic stimulus.
Labour Market Statistics
Labour Force Survey statistics for September to November 2024 show that Scotland’s unemployment rate fell over the quarter to 3.8% (UK: 4.4%), while the employment rate rose to 74.8%, and the inactivity rate fell to 22.9% over the same period, indicating an improving labor market situation in Scotland compared to the UK overall.
Wider labor market data also continues to indicate stability alongside some loosening over the past year, suggesting a gradual easing of tight labor market conditions.
The number of payrolled employees in Scotland fell slightly in December to 2.45 million, while Scotland’s claimant count unemployment rate remained at 3.8%, showing slight employment reduction alongside stable unemployment claims.
Business Survey Data
Business survey data suggest loosening in the labor market, with the share of businesses reporting that the number of employees will increase falling in recent months, indicating a softening in hiring expectations.
Instead, the share of businesses reporting the opposite has recently increased and overtaken that share, suggesting potential job reductions.
Some businesses continue to face staffing shortages; however, BICS data further indicates that recruitment challenges have been gradually easing over the past year, easing pressure on businesses to find employees.
Nominal median monthly PAYE pay in Scotland was £2,485 in December 2024, up 4.8% over the year, showing an increase in average monthly earnings.
This remains above the average annual growth rate over the past nine years (4.3%), however has slowed from higher rates in 2023, indicating a deceleration in wage growth.
Adjusting for inflation (2.5% in December), real median earnings grew 2.1% annually, showing an increase in purchasing power after accounting for inflation.
Consumer Sentiment
The Scottish Consumer Sentiment Indicator fell back into negative territory in the second half of 2024 and weakened further in the fourth quarter of the year, reflecting increasing concerns among consumers.
Sentiment rose, however, by 5.2 points in the month to December 2024 but remains negative overall (-2.1), with households still most concerned about their household finances and spending, indicating slight improvement in consumer mood but ongoing financial worries.
On balance, respondents continue to expect the economy to grow over the coming year, showing cautious optimism about future economic prospects.
Business Optimism
Business optimism remains positive; however, businesses are increasingly concerned about taxation, indicating an emerging challenge for businesses.
The RBS growth tracker monthly business survey for January showed that Scottish business activity continued to fall at the start of the year (49.6), though at a marginal rate and to a lesser extent than in December, showing continuing but moderating business activity decline.
Business optimism remained positive and picked up slightly in January (55.0), however it remained notably lower than during the past couple of years following a sharp fall in the final months of 2024, indicating slight recovery in optimism but still below previous levels.
The main concerns reported by businesses in February 2025 are falling demand for goods and services (16.7%) and taxation (15.4%), which have overtaken concerns on inflation and energy prices, demonstrating a shift in key business anxieties.
The concern about taxation has risen sharply since October, likely reflecting new fiscal policy measures by the UK government, indicating the impact of fiscal policies on business sentiment.
Economic Forecasts
The SFC forecasts Scottish economic growth to rise from 1% in 2024 to 1.5% in 2025 and 1.6% in 2026, predicting gradual economic improvement in the coming years.
The outlook for inflation is more stable than in recent years; however, inflation is forecast to rise to 3.7% in 2025 and remain above target until the end of 2027, predicting that inflationary pressures will persist, exceeding desired levels.
Higher and more persistent inflation over the forecast period reflects a recent increase in energy prices and regulated prices such as water charges, while employer NICs is also expected to add to inflation, attributing sustained inflation to specific cost factors.
Global Macroeconomic Conditions
Global macroeconomic conditions and geopolitical tensions remain downside risks to the outlook in 2025, indicating external factors that could negatively impact economic performance.
US Economic and Trade Policy: US tariffs and potential retaliation risks international trade flows and global inflationary pressures, suggesting the influence of US policies on global trade.
Macroeconomic Uncertainty: Economic policy uncertainty presents downside risks for growth, inflation, public finances, and the pace of monetary policy loosening, underscoring the broad potential impacts of uncertain economic policies.
Geopolitical Tensions: some recent positive signals; however, the significant risks remain, with the potential of escalating conflicts to impact energy prices, supply-chains, shipping costs, and broader commodities, highlighting the sensitivity of the economy to global conflicts.
Factors Influencing Growth
Economic conditions, uncertainty, and expectations
Households and businesses navigate domestic and international uncertainties, impacting growth, inflation, and interest rates, indicating the effect of economic conditions on financial behaviors.
Public finances and fiscal constraints, US economic and trade policy, geopolitical tensions.
How we respond to economic conditions
Changes in consumer and business behaviors.
Potential for innovation and productivity to reflect changes in consumer tastes and habits.
Significant change within many parts of the economy.
Changing structural economic conditions
Labor market, skills, supply chains, and remote/hybrid working.
Investment remains key
Scotland benefits from FDI.
Business investment remains weak.
Investment opportunities are strong in renewable