Scotland’s economy shows signs of resilience amid persistent challenges. Inflation remains above target but is stable, while the labour market has loosened despite strong wage growth.
Consumer sentiment remains negative but retail sales have improved. Business activity contracted in September, yet optimism strengthened. GDP growth in Scotland and the UK was modest, with forecasts remaining subdued. Although growth trails pre-Covid trends, international comparisons suggest the UK is outperforming several major economies in post-pandemic recovery.
Sectoral shifts shape price trends
The rate of inflation held steady over the summer, with prices rising by 3.8 per cent in the 12 months to September on the Consumer Price Index (CPI) measure – almost double the Bank of England’s target of 2 per cent – and unchanged on the previous month. With housing costs included (CPIH), inflation rose by 4.2 per cent in the year to April, and by 1.2 per cent compared to the previous month.
The largest upward driver of CPIH came from the transport sector. Although some transport prices – notably petrol, diesel and air fares – fell in September, transport’s impact on inflation comes from its relatively high weighting on the CPIH index and the larger decreases that occurred in September 2024.
The most significant downward contribution came from recreation and culture, with the sharpest decline being live music, where prices fell by 8.6 per cent in September this year, whereas prices rose by 5.8 per cent last year.
There was a modest downward contribution from owner occupiers’ housing (OOH) costs (the outlay that comes from owning, maintaining and living in one’s own home). Over the 12 months to September, OOH costs rose by 5.2 per cent, down from a high of 8 per cent at the start of this year and the slowest rise since September 2023.
Growth in UK average monthly rents slowed to 5.5 per cent in the 12 months to September, to £1,354, down from a rise of 5.7 per cent in the year to August.
International comparisons suggest the UK is outperforming several major economies in post-pandemic recovery
Increases in private rents continued to slow in Scotland, up 3.4 per cent on the year to September, to an average of £1,004.
The average price for a house in Scotland was £194,000 in August, a rise of 4.0 per cent, or £8,000, over the last year. Average house prices across the UK are higher, at £273,000, but increased at a slower rate of 3.0 per cent.
The Bank of England expects the annual CPI rate to fall to 3.2 per cent in March next year, which provided the Monetary Policy Committee with the confidence to maintain interest rates at 4 per cent in November.
Labour market loosens
Recent data indicates a further loosening of the labour market. The number of employees on company payrolls (which includes double counting as some workers have multiple jobs but does not include the self-employed) fell by 4.3 per cent in the 12 months to September in Scotland; meaning that payroll employment in Scotland has fallen in every month of this year on an annual basis.
At a sectoral level, there were notable declines in mining and quarrying, with a 3.94 per cent reduction across the UK; 38.4 per cent of payrolled employees in this sector are in Scotland and the fall reflects the decline of oil and gas in the North Sea.
More encouragingly, there was a 4.06 per cent increase in payroll headcount in the energy production and supply sector, another sector where Scotland has an above average share of workers.
The Scottish claimant count for those unemployed and claiming benefits was 3.5 per cent in September, an increase of 1.6 per cent from August, but down by 7.5 per cent over the year.
Labour Force Survey (LFS) data suggested that in the third quarter of this year both unemployment and inactivity (those not in nor seeking work) increased in Scotland, while employment fell. However, unemployment and inactivity were lower, and employment higher, than the same time last year.
These findings should be treated with caution due to ongoing volatility with estimates in the LFS and also may contradict the administrative HMRC data on payroll employment.
Despite the backdrop of a challenging climate for jobseekers, wage growth remains strong.
Staffing levels grew for the first time in 12 months, the strongest increase of all UK nations and regions
Median monthly pay in September was £2,574 in Scotland, a rise of 5.8 per cent on the year, slightly above the UK, which increased by 5.47 per cent to £2,543.
However, this masks sectoral variations – median pay in mining and quarrying fell by 3.29 per cent in the 12 months to September, although wages are much higher in this sector than average, at £4,416. The sector with the highest increase was transportation and storage, where wages rose by 8.07 per cent, to £3,001.
Retail sales rise amid persistent pessimism
The Scottish Consumer Sentiment Index remains negative for expectations for the economy and household finances, and current household spending.
However, the indicator did rise by 0.6 points to an overall score of -8.3 in the third quarter, which does mark an improvement from the last quarter.
This means that more respondents to the Scottish government’s survey of consumer sentiment consider performance to be worse now than 12 months ago (for the current indicators on the Scottish economy, household finances and household spending) and also expect performance to worsen over the coming year (for the future indicators on the Scottish economy and household finances).
However, the rise of 0.6 points comes from slightly more people responding with positive scores rather than negative scores than previously.
There was more encouraging news from retail performance. According to the Scottish Retail Sales Monitor from the Scottish Retail Consortium (SRC) and KPMG, sales increased for the third consecutive month, with total sales in Scotland rising by 1.3 per cent in September 2025 compared with the year before.
Shopper footfall data from the SRC/Sensormatic show that while there was a 0.1 per cent decrease on visits to retail outlets in October compared to the year before, this was a notable improvement on the decrease of 2.3 per cent in September’s score.
This may present some much-needed pre-Christmas cheer to retailers ahead of the busy festive season.
Modest recovery in business activity
Scottish business activity remained weak in September. The Royal Bank of Scotland Regional Growth Tracker, a seasonally adjusted index that measures month-on-month changes in output, decreased to 49.2 in September in Scotland, down from 50.3 in August (a score below 50 indicates a contraction).
More encouragingly, optimism about future output growth in Scotland rose to a three-month high and staffing levels grew for the first time in 12 months, the strongest increase of all UK nations and regions.
Looking beyond Scotland, the Export Climate Index, an indicator of the performance of Scotland’s export markets, was 51.7 in September, up from 51.2 in August and the eighth consecutive month above the positive 50 score – perhaps a surprise given the headwinds in global trade this year.
Output rose in Scotland’s top three export markets: the Netherlands, US and Germany.
All survey measures in the Fraser of Allander Institute (FAI) Scottish Business Monitor covering the period from July to September were negative, making this the fourth consecutive quarter where more firms said that indicators would decrease rather than increase.
UK and Scottish economies expand
Initial estimates suggest that UK real GDP (taking inflation into account) grew by 0.3 per cent in the three months to August compared to the period from March to May. Economic growth was driven by stronger performance in services, which rose 0.4 per cent, and construction, where output grew by 0.3 per cent.
But this was offset by by a 0.3 per cent contraction in production. National Accounts statistics for the second quarter show that Scottish GDP increased by 0.2 per cent in real terms, unrevised from initial estimates.
In aggregate, the Scottish economy is 1.0 per cent larger in real terms compared to the second quarter of last year. However, on a per head basis, real GDP did not grow at all over the second quarter and only increased by 0.4 per cent compared to a year before.
Economic growth was driven by stronger performace in services and construction
Growth forecasts for this year remain weak, at least compared to the pre-financial crisis trend. In October, the FAI revised its forecast for Scottish economic growth in 2025 compared to June, raising it from 0.8 per cent to 1.0 per cent, and left its estimates for 2026 and 2027 unchanged at 1.0 per cent and 1.1 per cent respectively.
UK growth in the second quarter trailed the G7 average of 0.5 per cent but was stronger than the Eurozone which grew by 0.1 per cent as its largest member, Germany, contracted by 0.3 per cent.
However, both the IMF and OECD forecast that the UK will have the second strongest GDP growth in 2025, behind only the US.
Analysis of data since the pandemic suggests that UK real GDP is now 5.2 per cent higher than at the end of 2019, slightly higher than France and Japan, which have grown by 5.1 per cent and 4.2 per cent respectively, and far ahead of Germany which has barely grown at all.
In association with Prosper
