As we approach the end of 2024, Scotland’s economy reveals both encouraging and complex dynamics, offering a snapshot of gradual recovery alongside persistent challenges.
Key economic indicators have shown improvement, with GDP growth gaining modest momentum and inflation edging closer to its target rate. This has brought relief to households and businesses across the country and bolstered consumer confidence, which has turned positive for the first time since early 2022.
Overall economic growth has largely been driven by the robust performance of the services sector, which expanded by 1.3% annually in the second quarter of this year. Comprising nearly 80% of Scotland’s economic output, services have played a vital role in buoying GDP, particularly across retail, professional services, and financial activities.
However, other sectors have lagged behind with production output dipping by 0.1% and construction decreasing by 1%. Despite these declines, small and medium-sized enterprises (SMEs) in the construction sector have reported a strong rise in new work since March, suggesting potential for future recovery.
Lower inflation has had a profound impact on consumer sentiment, with household confidence gradually improving as people regain optimism about their financial futures. Consumer sentiment turned positive in May, driven by better perceptions of the economy and personal finances.
Nonetheless, the public remains cautious as personal financial outlooks are still somewhat lower than general economic sentiment, reflecting the lingering effects of recent inflationary pressures.
Reports from the third quarter show cautious optimism among Scottish businesses. While 85% of firms remain wary of economic uncertainty, there is a noticeable shift toward moderate growth expectations. The number of businesses predicting "very weak" growth has decreased significantly since the start of the year, employment levels have seen a net improvement, and there has been a steady reduction in operating costs as inflation eases.
The outlook for capital investment is promising yet uneven. Although slightly negative at -1.4, new business sentiment has significantly improved from a low of -13.5 earlier in the year, indicating hopeful signs for future investment growth. Capital investment has shown steady improvement since the start of the year, particularly following the Bank of England’s recent rate cuts.
Labour shortages persist as a concern for Scottish businesses, especially in sectors like construction, manufacturing, and hospitality. Although the tightness in the labour market has slightly eased compared to the elevated vacancy levels of 2023, about 26% of businesses still report difficulties in filling positions. This issue is not uniform across all industries; sectors such as information technology face fewer recruitment challenges, highlighting the nuanced nature of Scotland’s labour market recovery.
At the same time, the broader UK job market is exhibiting signs of cooling. Unemployment has inched up with figures from the Office for National Statistics (ONS) indicating a rise to 4.3% in the three months to September, up from 4% in the previous quarter.
While the ONS advises caution in interpreting these figures due to data collection issues, other indicators point to a slowdown. The number of employees on company payrolls decreased by 9,000 over the quarter, and job vacancies fell for the 28th consecutive month, reaching their lowest level since May 2021. Notably, Scotland's unemployment rate remains low at 3.3%, reflecting a relatively robust labour market compared to the broader UK.
These trends suggest that while recruitment pressures may be easing slightly, they also reflect a softening in the job market that could impact consumer spending and overall economic momentum. For Scottish businesses, this dual reality means navigating both the relief of eased hiring pressures and the challenges of a potentially slowing economy.
Scotland faces enduring social challenges. Inequality remains a significant concern, with notable disparities in quality-of-life indicators based on income, age, and disability status. There's a 13 point gap in well-being scores between those earning up to £27,000 and higher-income earners.
Despite economic gains,Additionally, 43% of social housing tenants struggle to keep their homes adequately warm, underscoring the urgency of addressing basic living conditions. With one in four Scottish children still living in poverty, the government faces mounting pressure to implement more effective social safety nets.
Furthermore, trust in government is at a record low, with over three-quarters of Scots feeling they lack influence over decisions impacting the UK. This democratic deficit could have broader implications for economic sentiment and stability.
Looking ahead, Scotland’s economy has a stable foundation for growth, bolstered by improvements in inflation, consumer confidence, and service sector performance. Nevertheless, sectoral disparities, recruitment challenges, and social inequalities underline the need for targeted policy measures to ensure that economic growth is inclusive and sustainable.
Economic projections suggest moderate growth over the next year, with firms remaining hopeful yet cautious. While overall sentiment is improving, achieving a fully resilient Scottish economy will require careful navigation through complex social and economic landscapes.
John Walls is head of data analysis at s1jobs.
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