‘the picture is still one of subdued growth‘
Economic and business conditions in early 2025 showed limited improvement, as firms across Scotland brace for upcoming cost pressures.
This is according to the latest Economic Commentary from the Fraser of Allander Institute at the University of Strathclyde, which covers the latest data on the UK and Scottish economies.
The Institute’s economists have downgraded their growth forecast for 2025 and 2026 to reflect economic conditions in both the UK and the world economy. The Fraser of Allander now expects growth in 2025 to be similar to growth in 2024 at 0.9%, before increasing to 1.1% in 2026.
While GDP in Scotland and the UK grew over 2024, and inflation has continued to ease, the outlook among businesses remains pessimistic.
Inflation fell unexpectedly fell to 2.8% in February, offering some relief to households and policymakers. However, services inflation remains high at 5%, meaning the Bank of England is likely to remain cautious in cutting interest rates over 2025.
The easing of inflation comes just ahead of changes to the UK’s employers National Insurance system, which came into effect as of April. These increases are expected to raise costs for employers and are already weighing on business sentiment.
New data from the Fraser of Allander Institute’s Scottish Business Monitor shows that 94% of firms expect cost pressures to increase in the first half of 2025, with three in four businesses highlighting National Insurance changes as a significant concern.
Professor Mairi Spowage, Director of the Institute, said: “Economic conditions in 2025 are turbulent and uncertain, and are likely to remain so throughout the year. Therefore, the picture is still one of subdued growth. Many of the challenges businesses faced in 2024 – from rising costs to policy uncertainty – have not gone away.
“Added pressures from National Insurance changes and geopolitical instability risk dampening confidence and growth further. These tax changes will start to hit businesses next week, with many scaling back plans for workforce expansion and recruitment as a result.”
Alongside its regular economic analysis, this quarter’s commentary also includes a detailed look at Scotland’s disability and carer benefits system, exploring how many people are receiving support and how much this is expected to cost over time. Spending on these benefits is projected to nearly double between 2020-21 and 2029-30, adding further pressure to Scotland’s fiscal outlook.
The commentary also reflects on the UK Chancellor’s Spring Statement, which contained significant fiscal policy announcements despite efforts to downplay its importance. Cuts to departmental budgets and reforms to disability benefits signal tougher times ahead for devolved budgets.
João Sousa, Deputy Director of the Institute, said: “The Spring Statement had clear implications for Scotland. Although there is a modest short-term funding increase, the medium-term outlook is significantly more challenging, with Holyrood’s budget for day-to-day spending expected to be nearly £900 million worse off by 2029-30.
“We’ll learn more about what this means for Scotland when the Scottish Fiscal Commission publishes its next forecast in May, but it’s certain to be another significant pressure on the Scottish Government’s desk.
“The Chancellor has staked all her credibility on meeting her fiscal rules, but the buffer remains very small against the many risks encircling the UK economy, including those from global trade shocks. If any of those materialise, then we might be back in a similar position in the Autumn.”
You can see the full commentary here.
