Tag: growth forecasts downgraded

Fraser of Allander: Optimism fades as economists downgrade growth forecasts for Scottish economy

The outlook for the Scottish and UK economies has weakened, with growth now expected to remain sluggish through the rest of 2025.

In its latest quarterly Economic Commentary, the Institute has downgraded its forecasts for Scottish economic growth to 0.8% in 2025 and 1% in 2026.

This comes despite more upbeat projections from both the Scottish Fiscal Commission (SFC) and the Office for Budget Responsibility (OBR), which have recently upgraded their expectations for 2026 whilst similarly revising down their GDP forecasts for 2025.

Economic growth is now slowing compared to the start of the year and inflation has also edged up to 3.4%, after staying below 3% throughout 2024.

The business environment is also showing signs of strain, with companies reporting cutting back on activities in the first quarter compared to last year, plagued by rises in National Insurance Contributions, which took effect in April, alongside uncertainty surrounding President Trump’s trade tariffs. Indeed, pay growth and employee numbers are down, signalling potential weaknesses in the labour market.

The current state of the economy was not unexpected: Institute Director Professor Mairi Spowage warned of turbulent and uncertain conditions which could last throughout the year in the previous commentary.

Professor Spowage said: “After a strong start to the year, the Scottish economy has faltered in March and April and is essentially the same size in real terms as it was six months ago.

“Unfortunately, the wider business environment and global events are still taking a toll on businesses and consumers, which is having a dampening effect on spending and business investment.”

In addition to the latest economic analysis, the commentary provides an overview of Universal Credit and Legacy Benefits in Scotland, a key element of the nation’s social security system, and summarises key takeaways from June’s spending review and medium-term financial strategy.

Dr Joao Sousa, Deputy Director of the Institute, said: “The fiscal announcements by both governments suggest that there are significant economic challenges in the years and months to come for the UK and Scottish Governments.

“Particularly from 2027-28 onwards, the choices of Government look to become more difficult. Of course, this is the role of the Government in power: but the difficulties of the UK Government this week show that events can quickly derail its plans.”

Read more here.

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Fraser of Allander Institute downgrades growth forecasts

‘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.