30th September 2026
Scotland's economy has shown more resilience than might have been expected in a period of geopolitical uncertainty, rising costs and continuing pressure on household finances.
But the latest economic commentary from the Fraser of Allander Institute comes with an important qualification. The economy is growing, but the growth is modest, the labour market is weakening and the Scottish Government faces difficult choices over how it pays for an ambitious programme of public spending and reform.
The Institute's latest forecast puts Scottish GDP growth at 1.1% in 2026, followed by 1.1% in 2027 and 1.2% in 2028. That is an improvement on its June forecast, which predicted growth of 0.9% this year, 1.0% next year and 1.1% in 2028.
There was also relatively strong growth in the latest quarter. Scottish GDP increased by 0.7% in the three months to June 2026, although revisions to earlier figures mean that the previously reported uninterrupted run of quarterly growth has now been broken.
The Institute cautions that the figures are particularly uncertain because of the turbulent international environment and the likelihood of further revisions.
Looking at the bigger picture, however, Scotland and the UK have continued to follow broadly similar long-term trends. Compared with 2022, both economies were around 4% higher by the second quarter of 2026.
That is a degree of resilience, but it is hardly an economic boom.
And the labour market is providing a warning sign.
Fraser of Allander has developed its own employment estimates because of continuing problems with the Office for National Statistics Labour Force Survey. Its model suggests an employment rate of 73.7% for people aged 16 to 64, compared with 74.0% from the official survey.
More importantly, both the Institute's modelling and the official data point towards weakening employment during 2026.
Payrolled employment has fallen consistently since 2023. There were around 23,100 fewer people in payrolled employment in July 2026 than in December 2023.
The impact has not been evenly distributed.
Young people have been particularly affected. Payrolled employment among 16 to 24-year-olds has fallen, while the decline among those aged 25 to 34 has been even more pronounced. The Institute estimates that the proportion of working-age adults in payrolled employment has fallen by 0.6 percentage points since its peak in late 2023, with the decline reaching 2 percentage points among those aged 25 to 34.
Retail and hospitality are especially important.
Together they account for around 8,600 of the payrolled jobs lost, with hospitality employment down 2.5% over the year and wholesale and retail employment down 1.1%.
That matters beyond the headline employment figures. Retail and hospitality provide many entry-level jobs and are particularly important to young people starting their working lives.
For towns such as Wick and Thurso, where retail, hospitality and tourism form an important part of the local economy, national employment trends in these sectors are therefore worth watching closely.
There is another side to the labour-market story. Scotland's claimant rate for unemployment-related benefits was 3.0% in July, below the UK figure of 3.8%. But Fraser of Allander warns that claimant numbers should not be confused with unemployment itself, particularly as more people may now be receiving health-related or other benefits without being required to seek work.
The report also finds some evidence that the growth in disability benefit caseloads in Scotland may have levelled off. The number of people receiving additional-cost disability benefits has declined since early 2025 before reaching a plateau, while new Adult Disability Payment awards have been lower than previously expected.
Then comes the bigger problem for government.
The Scottish Government's five-year Programme for Government contains major commitments covering health, housing, childcare, transport, food prices, public-service reform and poverty.
But Fraser of Allander questions whether the finances will be sufficient to deliver them all.
The Institute points to a forecast 1.2% real-terms fall in the Scottish resource budget in 2027-28. The capital budget is also expected to fall, although the final position could change following the UK Budget on 28 October.
That leaves the Scottish Government facing an uncomfortable calculation.
Economic growth is being presented as an important means of supporting its wider programme. Yet growth of around 1% a year does not create a huge amount of additional fiscal room.
The Institute also questions whether savings from major public-sector reorganisations will arrive quickly enough to help. Restructuring health boards, local government and other public bodies can itself involve substantial transition costs, and anticipated savings are not guaranteed.
This is particularly relevant to the proposed reorganisation of Scottish local government.
The Government wants to move from 32 councils towards a smaller number of regional authorities alongside much more local community-level decision-making. But Fraser of Allander warns that changing structures does not automatically improve services.
The real test will be whether those changes produce services that are more effective, sustainable and responsive while also delivering whatever savings are being assumed.
That puts the UK Budget on 28 October and the Scottish Budget on 3 December firmly in the spotlight.
The Fraser of Allander Institute describes them as the first real test of whether the Scottish Government's ambitions can be delivered within a constrained fiscal environment.
For Scotland, therefore, the latest forecast contains both good and bad news.
The economy is growing. It has proved more resilient than might have been feared.
But growth of around 1% is not enough to make difficult choices disappear.
And that may be the most important message in this latest economic commentary. The debate over Scotland's future is no longer simply about whether the economy is growing.
It is about how much can realistically be achieved when the economy is growing slowly, the labour market is weakening and government budgets are under pressure at the same time.
For Caithness, Wick and Thurso, that national picture matters because modest economic growth, weaker employment in sectors such as retail and hospitality, and pressure on public spending eventually feed through into local businesses, households and public services.
The figures may look reasonably reassuring at first glance.
The underlying message is rather more complicated.
Fraserof Allender commentary 30 September 2026