Data in 2023 so far has shown that the economy has performed better than was expected only a few months ago, according to the Fraser of Allander Institute.
The Institute’s quarterly Economic Commentary, which includes an assessment of all the latest key data on the UK and Scottish economies, is published today.
In the Deloitte-sponsored Economic Commentary, the Strathclyde researchers have set out their new forecasts for the Scottish Economy.
The economists are forecasting growth of 0.5% in 2023, 0.7% in 2024 and 1.2% in 2025. For 2023, this is a significant revision up from the Institute’s previous set of forecasts in March, which indicated that by now Scotland’s economy would be in a shallow recession.
However, the Institute’s outlook for 2024 and 2025 has worsened somewhat, reflecting stubbornly high inflation and the continued response from the Bank of England in raising interest rates: which are now at 5%, with further rises likely, rather than peaking at 4.75% as expected in March.
Analysis in the Commentary this quarter includes a detailed look at the attitudes of consumers; the extent to which businesses have been absorbing cost increases as opposed to passing these on to their customers; the state of the housing and rental markets; and a special analysis of the prospects for social enterprises in our economy in these difficult times.
Professor Mairi Spowage, Director of the Institute, said: “We have improved our outlook for growth in 2023 due to outturn economic data being significantly better than was expected. However, the increased downward pressure on demand that is going to impact growth in 2024 and maybe beyond has led us to be less optimistic about growth next year and the year after.
“Confounding our expectations, consumer spending has remained pretty resilient in the first quarter of the year. There is some evidence that this is being supported by increased borrowing, which may be a concern for the resilience of consumers as we move through the year.
“All of the evidence we have looked at in this edition would support that, in the main, businesses have been trying to absorb costs rather than pass them on to their customers. The signs are that more of them will have to pass through costs soon though which may lead to further price rises for consumers.”
Douglas Farish, Office Senior Partner for Deloitte in Edinburgh said: While Scotland’s economic performance has exceeded expectations from just a few months ago, challenges for businesses will persist throughout this year because of ongoing high inflation and rising interest rates.
“With a still challenging economic environment, businesses are focused on costs and have remained cautious about investing. Focus must now turn to strategies to navigate the challenges that this presents. Tapping into the resilience developed over the last few years, while also fostering productivity and developing skills, will be essential to help mitigate the current economic climate’s impact on business operations now and over the longer term.”
The Commentary also analyses some of the key headlines from the Scottish Government’s Medium Term Financial Strategy (MTFS), which set out some pretty stark challenges facing the Scottish Government in balancing their books for the next financial year.
Emma Congreve, Deputy Director of the Institute, said: “The MTFS set out that there is currently a £1billion gap between the funding that the Scottish Government is expecting through the block grant and tax receipts and the money they require to meet their existing commitments.
“The Scottish Government set out that tough decisions will be required – but without setting out what would guide their decisions on where the axe would fall. Whilst this was not a budget, it is reasonable of the opposition parties to ask where savings may be found.
“What is clear is that the Scottish Government are trying to manage expectations of both those it funds and those who hold it to account – essentially saying that the budget round for 2024-25 is going to be difficult and very challenging.”
This quarters commentary also includes two perspectives:
- Scotland’s recovery from Covid-19 – submission to the Scottish Affairs Committee – Professor Mairi Spowage
- Criminal Justice and the cost of reoffending in Scotland – Joy Samuel and Allison Catalano
Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.
Ben is an economist at the Fraser of Allander Institute working across a number of projects areas. He has a Masters in Economics from the University of Edinburgh, and a degree in Economics from the University of Strathclyde.
His main areas of focus are economic policy, social care and criminal justice in Scotland. Ben also co-edits the quarter Economic Commentary and has experience in business survey design and dissemination.
Kate is a Knowledge Exchange Assistant at the FAI working across a number of project areas. She is currently studying for her MSc in Economics at the University of Edinburgh and has a bachelor’s degree in Economics from the University of Strathclyde. Kate is also the Outreach Coordinator at the Women in Economics Initiative which aims to encourage equal opportunity and improve representation in the field.
Adam is an Economist Fellow at the FAI who works closely with FAI partners and specialises in business analysis. Adam's research typically involves an assessment of business strategies and policies on economic, societal and environmental impacts. Adam also leads the FAI's quarterly Scottish Business Monitor.
Find out more about Adam.