With inflation steadying, business activity bouncing back and positive growth forecasts, the economic outlook is improving. However it will take time for the benefits to be widely felt – and there are still risks to recovery
There are welcome signs that the economy is moving in the right direction with moderating inflation and an easing in energy prices. However, as our analysis shows it will take time for households and businesses to really feel the benefits of these following a period of such sustained cost rise, and external risks to economic recovery remain.
UK inflation (including housing costs) was 3.8 per cent on an annual basis in the 12 months to February 2024, with the rate of increase slowing to just 0.6 per cent month on month.
Inflation excluding housing costs (CPI) rose by 3.4 per cent on an annual basis but again at a slower rate month on month compared to January 2024.
The rising costs of housing and household services and motor fuel created upwards pressure on the monthly trend while lower food, restaurant and cafe prices helped to offset these.
Costs for owner occupiers rose 6 per cent in the 12 months to February, a slight acceleration. Although slower rates of increase in food prices are welcome, in January the ONS report showed these had risen 25 per cent in the past two years, compared to the 10 per cent rise seen over the previous ten.
Inflation expectations affect both consumer spending habits and confidence. They also feed into considerations of market data by rate setters. According to the Bank of England’s inflation attitude survey, UK citizens believe that inflation has reached its lowest point as of February 2024. Consequently, fewer people surveyed (36 per cent) expected interest rates to rise further over the coming 12 months.
Rates have been rising since late 2021 to dampen demand and inflation. They are currently 5.25 per cent, remaining unchanged for the fifth month in a row in March 2024 as the
Bank of England’s expectations are that a recovering economy and ongoing conflict in the Middle East could still put upward pressure on inflation in the short term.
Other countries have also seen inflation rates decelerate at the start of this year though rates vary across the zone. The US saw a slight rise (3.2 per cent) thanks to gas and housing cost rises, suggesting it is facing similar challenges to the UK in bringing inflation back to a 2 per cent target.
Energy price rises are a greater component of inflation in the UK than the US (and some other EU countries) where non-food and non-energy costs underpin inflation.
Modest retail sales reflect inflated costs of living, includ- ing housing, despite moderating inflation. As inflation rates have fallen, so fewer people are reporting rising costs of living.
Although still a significant minority of the population (46 per cent), the proportion of people reporting an increase in February declined. Most people saw no change in the month with just 3 per cent saying it had fallen.
A new source of housing market data from the Office for National Statistics (ONS), released as ‘in development’, sheds light on housing costs. It showed that in the 12 months to February private rents in Scotland rose by 10.9 per cent, ahead of most parts of the UK including London but slightly slower than January.
It is worth noting that these are for new lets rather than all tenancies and for most of Scot- land rent levels remain below the UK average in local areas. While average house prices fell in England and Wales over the same period, they rose in Scot- land by 4.8 per cent.
Though headline inflation pressures are easing there is little evidence to suggest this
is feeding through to the high street and household spending. In a slow start to the year, total Scottish retail sales in February rose just 1.4 per cent on the same period a year ago and below the three-month average of 1.8 per cent. Taking inflation into account there was a year- on-year decline of 1.1 per cent.
The Scottish Consumer Senti- ment index for January 2024 provides evidence that despite moderating inflation, Scots households remain cautious. The index has been negative for more than a year though recent months have seen a slight im- provement.
In January more households were optimistic than pes- simistic, but the reverse was true when it came to their own finances.
Private sector business activity rebounds
Despite cost pressures, levels of business activity have picked up and February saw an improve- ment in levels of private sector activity.
The Royal Bank of Scotland Regional purchasing manag- ers’ index (PMI) data showed increased activity, driven by services, with the strongest expansion for more than six months.
New business orders and employment also expanded and expectations for future activity remain positive, with the first indication of an easing in cost pressures seen in the February survey.
Businesses still face supply chain challenges with disrup- tion from conflict in the middle east and rising shipping costs. In Scotland, 8.1 per cent of businesses reported in March that haulage and/or transporta- tion costs were forcing them to consider raising prices.
In January the UK PMI indi- cator for supplier delivery times dropped to its lowest level since mid-2022.
However, not all businesses are affected by this issue with just 4 per cent of BICS (Business Insights and Conditions Survey) respondents in Scotland high- lighting supply chain disruption as a challenge with those in the manufacturing and retail sectors most affected.
Labour market indicators remain positive though there are signs that shortages are easing. The number of patrolled employees (from experimental HMRC data) rose in Scotland in January by 1 per cent a year ago and to its highest level on this measure since 2014.
However, we also saw a drop in the employment rate to 74.5 per cent (the proportion of adults in employment) over the year to January 2024, a small rise in the unemployment rate (to 4.1 per cent) and a rise in the inactivity rate to 22.5 per cent in the UK).
The good news, for employees at least, is that pay rates are still rising. Early estimates for February suggest that median pay levels in Scotland rose by 3.6 per cent on the same period a year ago, but behind the UK rate (5.5 per cent).
The rate of pay growth is slowing but as inflation has come down so median pay, adjusting for inflation, rose by 2 per cent in January, suggesting workers are starting to see more of the benefits of pay rises.
We may see a further softening in the labour market in the months ahead as the most recent BICS recruitment data for Scotland shows, one in five employers in February reported a shortage of workers, down from one in three a year ago.
Recruitment difficulties have contented to be most challenging in construction (27 per cent of respondents), manufacturing (25 per cent) and the accommodation and food services sectors (24 per cent).
A lack of qualified applicants and applications are the main reason for shortages although one in five employers reported being unable to meet salary demands.
Outlook for the economy improves
The UK economy was in recession (measured as two quarters of declining GDP) at the tail end of 2024, with declines in services, construction and production in the last quarter, though these may be subsequently revised.
The Office for Budget Responsibility forecast in March that UK GDP will rise by 0.8 per cent this year, slowly increasing to 1.9 per cent in 2025 and 2 per cent in 2026.
This is slightly better than the IMF’s forecast from January of 0.6 per cent growth in GDP this year and 1.6 per cent next year. Although the outlook for the UK this year is well below other advanced economies, it is more in line with the broad trend in advanced economies in 2025.
The UK’s former Permanent Secretary to the Treasury, Lord Nick Macpherson, has also suggested that “its very easy to get depressed about the British economy but the plain fact is that it generally grows”, suggesting that current forecasts could be on the conservative side.
The outturn (the total amount of goods or services produced) for 2023 for Scottish GDP was 0.2 per cent though GDP fell by 0.6 per cent in the final quarter. The downturn in the final quarter’s GDP reflected a drop in the production, construction and services sectors.
Looking ahead to this year the Scottish Fiscal Commission forecast the Scottish economy will expand by 0.7 per cent in 2024, rising to 1.1 per cent next year.
The Fraser of Allander Institute forecast similar growth while the EY Item Club is slightly more optimistic (0.7 per cent and 1.4 per cent).
Fresh thinking and novel solutions are needed for sustainable growth
Prosper (SCDI) will shortly launch its General Election manifesto asks of all parties on behalf of our members. Our manifesto, Growing for Good, asks all parties to prioritise measures which will generate sustained growth which lifts social prosperity and funds public services.
Recognising the demand for a change of approach from our members and the wider electorate to address stagnating incomes, a productivity puzzle, weak growth and high levels of inequality, we ask each party to consider whether their proposals will elevate Scotland’s strengths on a world stage while creating a prosperous future for Scotland’s people.
We have set six key tests:
- Will their programme increase investment including a stable economic strategy to mobilise investment?
- Will it drive up productivity, raise R&D spending and accelerate innovation?
- Will their programme support a skilled workforce and grow the working population in Scotland?
- Will it contain specific measures to nurture business purpose – prioritising profit with purpose?
- Will their programme include a credible plan to transition to net zero – with measures to drive green industrial growth and support transitioning places?
- Will it include measures to build place-based growth, with actions to improve living standards through better housing, transport, public realm and infrastructure?
Our detailed manifesto proposals build on our extensive research and policy engagement with our diverse membership and our recent economic blueprint.
While our recommendations are primarily for UK government the message from our members is that to achieve our ambitions will require more effective co-ordination between Westminster, Holyrood and local partners. The belief that the best ideas come from sharing diverse perspectives will shape our 54th Economic Forum in late May.
Here we will be presenting our plan to leaders of the Scottish and UK Governments, and the Labour Party.
Scotland’s Growth Revolution
Forum, Scotland’s best cross-sector economy event, is back for 2024. On May 30 in Edinburgh we will bring together the best minds from academia, business, government and the third sector to debate Scotland’s delivery of a green economy, quality jobs and good public services. The confirmed line-up so far includes Sally Magnusson, Alastair Campbell, Anas Sardar MSP, Productivity Institute CEO Bart Van Ark, and Noble & Co CEO, Angus MacPherson. To book your place visit prosper.scot/events/forum-24/