SCOTLAND’S economy is performing better than expected but consumers should be braced for further price increases and business should expect challenges to persist due to ongoing high inflation and soaring interest rates.

The latest data from the respected Fraser of Allander Institute at the University of Strathclyde shows that while the economy has improved from just a few months ago, the 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.

Gloomy outlook for economy as firms receive no respite from cost pressures

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.”

Noting that consumer spending remained “pretty resilient” in the first quarter of 2023 and “confounded our expectations”, Prof Spowage said: “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 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.”

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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 commentary, economists forecast growth of 0.5% in 2023, 0.7% in 2024, and 1.2% in 2025.

It notes that for 2023, this is a significant upwards revision from the Institute’s previous set of forecasts in March, which indicated that by now Scotland’s economy would be in a shallow recession.

Analysis in the commentary this quarter explores 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 the economy during current challenging times.

Douglas Farish, office senior partner for Deloitte in Edinburgh said that businesses must now focus on strategies to navigate the challenges presented by the current economic environment.

“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,” he noted.

The commentary also analyses some of the key headlines from the Scottish Government’s Medium Term Financial Strategy (MTFS) published in May.

Emma Congreve, deputy director of the Institute, pointed to the fact that the MTFS stated there is currently a £1 billion gap between the funding that the Scottish Government is expecting through the block grant and tax receipts and the money it requires to meet its 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. 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.”