Scottish Economic Bulletin July 2025

12th July 2025

The report provides a summary of latest key economic statistics, forecasts and analysis on the Scottish economy as at July 2025.

This edition of the Scottish Economic Bulletin focusses on latest economic indicators during the second quarter of the year in which we have seen further volatility in the global economic landscape.

The volatility is particularly in oil prices following the conflict between Israel and Iran, and businesses continue to adjust to the implementation of increased employer National Insurance Contributions (NICs).

Following a pick-up in growth during the first quarter of the year, the Scottish economy contracted by 0.2% in the 3-months to April as flat growth in the Services sector and a renewed fall in Production output more than offset stronger growth in the Construction sector. Anecdotal reports suggest this may partly reflect economic activity being brought forward in the year to avoid US tariffs, although as our analysis shows, the overall impact of tariffs on Scotland is expected to be modest.

The weakness in GDP growth has been reflected in business survey leading indicators with the RBS Growth Tracker signalling falling business activity in the first four months of the year, although the latest data for May and June indicate a return to growth, albeit modestly. However, demand remains fragile and businesses continue to report falling new work orders. This, alongside taxation, have been the two main concerns reported by businesses during the second quarter with increased labour costs following the rise in employer NICs adding to the cost challenges facing businesses.

Despite the rise in labour costs, the labour market remains resilient, albeit conditions continue to soften slightly. Unemployment rose to 4.2% in February to April and, although this is lower than a year ago, the number of payrolled employees in Scotland has also fallen 0.9% over the year to May. Business surveys have further indicated slightly reduced staffing levels in recent months, however latest data for June suggests this has stabilised, potentially indicating that reduced movement in the labour market reflects the current uncertainty facing businesses and labour market participants.

Elevated economic uncertainty continues to be reflected in weak consumer sentiment in Scotland. The Scottish Consumer Sentiment indicator did improve notably in May to -5.5, its highest level since December. However, sentiment remains firmly in negative territory with the weakness potentially reflecting the current increase in inflation back above 3% and the slowing pace of real earnings growth, alongside broader concerns regarding the scale of uncertainty in global economic conditions and the downside risks this presents to growth and inflation in the economy.

Encouragingly, the Growth Tracker indictor of business optimism continued to improve in June, albeit from a low base at the start of the year, as businesses' growth expectations for the year ahead have strengthened despite the challenging conditions businesses are currently facing. More stable inflation expectations and reductions in interest rates are improving business conditions. This improving confidence and its potential feed through to activity and investment is important if forecasts of weaker growth this year are to surprise on the upside.

The Scottish economy contracted by 0.2% in the three months to April, following the pick-up in growth in the first quarter of the year.

Scotland's economic output contracted by 0.2% in April and more broadly fell by 0.2% in the three months to April (UK: 0.7%), with the pace of growth slowing from the first quarter. Anecdotal evidence suggests that part of this pattern may reflect activity being brought forward in the year to avoid US tariffs.

The recent fall in output means the economy has grown 0.1% since the final quarter of 2024 and 0.5% over the past year.

The contraction in the 3-months to April was driven by a fall in Production output (-0.9%), partly offset by growth in Construction (0.5%), with Services sector output flat (0.0%). The fall in Production output was a result of negative growth in Manufacturing (‑2.0%) and Mining and Quarrying Industries (‑4.5%). This was partially counterbalanced by positive growth in Electricity and Gas Supply (3.2%) and Waste Supply and Water Management (1.4%), albeit the pace of growth in these sectors had also eased.

Within the Services sector, consumer facing services grew 1.3%, supported by growth in the Wholesale, Retail and Motor trades (0.8%) and Accommodation and Food services (2.0%). However, this growth was exactly offset by falling output in other services sectors, including in the Information and Communication sector (‑3.6%), Culture and Recreation (‑2.5%) and Financial and Insurance Activities (-1.4%).

Inflation
The inflation rate fell marginally in May to 3.4%, driven by easing transport prices.

Inflation fell from 3.5% in April to 3.4% in May. The decrease reflected a data error in the April figures that has not been revised by ONS, and which contributed to transport annual price growth slowing from 3.3% to 0.7% in May, offsetting a rise in food price inflation (4.3%, up from 3.3%) and furniture and household good price inflation (7.8%, up from 7.7%).

There remains a difference in the rate of goods and services price inflation, although the gap continued to narrow in May with services inflation falling to 4.7% while goods price inflation rose to 2% - its highest rate since November 2023. Core inflation (excluding energy, food, alcohol and tobacco) fell to 3.5% (from 3.8%), returning broadly back in line with its average annual rate over the past year.
In May, the Bank of England (BoE) forecast inflation to rise to 3.7% in September (3.5% on average over the third quarter) as a result of higher energy and water bills, the indexation of bills such as broadband and phone charges and the impact of higher employer NICs. From there, inflation is forecast to gradually fall back to around 2% by the start of 2027, though there remain risks in both directions to this forecast, including the current uncertainty surrounding global energy prices and the persistence of domestic factors.[5] Reflecting this, the Bank's Monetary Policy Committee held the Bank Rate unchanged at 4.25% in June, following its 25 basis point cut in May and is consistent with its gradual approach to loosening monetary policy over the past year.

Business Conditions
Business activity and optimism improved in June, however demand and cost pressures remain challenging.

Business Activity
The RBS Growth Tracker business survey reported that private sector business activity grew for a second consecutive month in June following a six month period of contraction. The Business Activity Index rose to 50.9 (a reading above 50 indicates growing activity) indicating that the pick-up in growth remains modest.

Furthermore, demand conditions remain challenging, particularly in the manufacturing sector, with businesses continuing to report a fall in new work orders (48.7) while staffing levels remained broadly unchanged (49.9). Despite this, business optimism improved for a third consecutive month (61.8), rising to its highest level since October last year.

Business Concerns
Key business concerns during 2025 have been falling demand and taxation, followed by inflation and energy prices. The latest Business Insights and Conditions Survey (BICS) for July shows that demand for goods and services continues to be the most commonly cited main concern by businesses in Scotland (12.8%), though its share fell from 17.3% in June to its lowest level since April 2024.

Taxation as a main concern rose from 10.4% in June to 11.6% in July, and while it is lower than its recent peak of 18% in April when the increase in employer NICs was implemented, it remains higher than its general level during 2023 and 2024.

This elevation in concern regarding taxation is broadly consistent with the Scottish Chambers of Commerce (SCC) Quarterly Economic Indicator business survey for Q2 2025, which reported that taxation remained the key concern among Scottish businesses with 70% citing increased concern from taxation, up 40% over the past year.

Read the full report with graphs HERE