Scottish economic insights - September 2025

27th September 2025

This edition of the Scottish Economic Insights report focuses on the first half of 2025 and early indicators for the third quarter.

2025 so far has seen notable shifts in both the global and domestic economic landscape.

Globally, uncertainty remains high, with the changes and significant increases in US tariffs since April alongside the ongoing wars in Ukraine and the Middle East.

Domestically, there remain fiscal challenges for the UK government, and businesses continue to adapt to increases in employer National Insurance Contributions and wider changes.

These factors present significant challenges for the economy to navigate, with slowing global growth this year and next weighing on trade and investment. Increases in US tariffs will impact GDP in the long term and we present new modelling of the long-run economic impacts of a stylised US tariff increase which shows that the tariff increase lowers Scotland’s GDP by 0.4% in the long run.

Despite the rise in headwinds, Scotland’s economy has remained resilient in the first half of the year with growth of 0.5%, broadly on track to meet the forecast of 1.1% for 2025 as a whole. Some of the early momentum in economic output at the start of the year eased off in the second quarter.

A key challenge for growth this year has been in the manufacturing sector, in which output has fallen 4.3% over the first half of 2025, with relatively broad based falls across food and drink production and refined petroleum production. The cessation of oil refining activity in Grangemouth in April and tariff uncertainty have also been factors affecting the manufacturing sector this year.

In contrast, the labour market has remained resilient in the first half of the year with the unemployment rate remaining low at 3.5%. Indications of underlying softening continue to persist with payrolled employees down slightly over the year and softer recruitment activity. The increase in employer NICs in April has been a notable new influence on the labour market, with the hospitality sector in particular seeing a fall in employees over the past year.

At an economy wide level, despite the loosening in labour market conditions, payrolled employee earnings growth remains robust, growing 6.5% annually in nominal terms in August. The pick-up in inflation this year has resulted in earnings growth slowing in real terms to 2.7% and growth is expected to ease further next year as pay settlements ease further.

Pay costs have remained a key cost pressure for businesses in the first half of the year and have been exacerbated by the increases in employer NICs, although concerns regarding taxation have eased. However, with UK government borrowing running higher than forecast and the prospect of fiscal tightening at the UK budget in November, business and consumer sentiment could weaken.

The main concern for businesses continues to be falling demand for goods and services. Consumer sentiment in Scotland has also weakened across the year. Despite the resilience in business optimism and the easing of financial conditions, with the Bank of England cutting interest rates to 4.0% in August, this concern has the potential to continue to weigh on investment intentions. Businesses are also looking at options for automation and this edition provides the latest business survey data on the adoption and use of AI, with a quarter of businesses in Scotland reporting to be using AI technologies.

Overall, the economy has shown resilience in the first half of 2025, however growth is forecast to slow slightly this year in the face of challenging headwinds before picking up in 2026. The latter requires some of the current uncertainty to settle and demand to strengthen. Ther are clear down side risks to this outlook, particularly given the weakness in consumer sentiment and the recent pick-up in the savings ratio and on-going scale of global uncertainty facing sectors in global supply chains. However, easing inflationary pressures, loosening financial conditions, the resilience in business optimism, and underlying strength in the labour market provide grounds for optimism.

Read the full paper HERE