Households and businesses are both positive about the period ahead – but housing costs are still rising.
The second quarter has seen a continued steady expansion in the economy with both households and businesses expressing greater degrees of optimism about the period ahead.
That said there remain some headwinds including high housing costs, stubborn inflation in some areas, lacklustre retail sales and a patchy economic recovery.
UK inflation plateaued over the past quarter and even rose slightly in July, though overall it remains low by recent standards.
The rate of inflation, on the measure that includes owner occupier housing costs, (CPIH), was 3.1 per cent in the 12 months to July 2024, up from 2.8 per cent over the 12 months to June.
The consumer goods and services element of this data, the Consumer Price Index (CPI), edged up slightly on an annual basis to 2.2 per cent in July (up on the 12 months to June 2024), above the official target although on a month-on-month basis it fell slightly.
Upwards pressure on prices on an annual basis came from four areas with the most significant contribution coming from housing and household services. This category includes gas and electricity prices, which fell sharply in the 12 months to July but by less than in the same period a year ago.
The biggest downwards contribution was from restaurants and hotels where prices rose at a slower 4.9 per cent over the 12 months to July (down from 6.4 per cent in June).
Cheaper transport costs also helped. Transport prices rose 0.1 per cent in the year to July thanks to lower prices across categories including maintenance and repairs of personal vehicles, passenger air transport and motor fuels.
However, housing costs for owner-occupiers rose for the seventh consecutive month, rising by 1.13 per cent in July on an annual rate measure.
The recent Bank of England rate cut to 5 per cent in August, the first since March 2020, is still feeding through to mortgage rates and monthly costs and should be visible in lower owner-occupier costs in the coming months.
However, it may be some time before a further cut as the Bank has indicated that inflation is likely to rise again temporarily in the second half of this year and most economists are currently predicting just one more cut this year.
There was a slight improvement in rental sector costs too over the period with private rents rising on average in Scotland by 8 per cent in the 12 months to July, still high but down on April (though note this is still classed as Office for National Statistics (ONS) experimental data and the Scottish data in this series are mainly for advertised new lets not subject to the price cap).
UK private rental costs rose at a slightly faster rate ( 8.6 per cent) over the period. RICS notes lower levels of new landlord listings in July in contrast to a modest rise in tenant demand at a UK level.
House prices rose by 4.3 per cent on an annual basis in June, up from May, and considerably ahead of the national average (2.7 per cent).
The average house price in Scotland in July was £192,000 though the ONS notes the volume of transactions and new builds data available was down in the period.
Businesses have also become more optimistic about the future with a significant drop in the proportions concerned about economic or business uncertainty, staff availability and political uncertainty.
Consumer sentiment on the rise
Scottish Consumer Sentiment rose in the second quarter of this year, the first rise in nine quarters according to Scottish Government (experimental) data.
All components of the index improved with current feelings about household spending and finances less negative than last quarter and sentiment about the economy today and expectations for both finances and the economy in future improving.
Despite the slight improvement in sentiment, there has been no real impact on retail sales. In August, the Scottish Retail Con sortium reported that total sales had decreased by 0.5 per cent compared with August a year ago.
However, this was a slight improvement on the three-month average which showed a decline but below the 12-month average growth (1 per cent).
The inflation-adjusted figure was a 0.2 per cent decline year-on-year with both lower food and non-food sales contributing.
Businesses cautiously optimistic
The latest Royal Bank of Scotland Growth Tracker showed private sector business activity in Scotland in July continuing to expand for the seventh consecutive month and up slightly in June.
New orders rose by a modest amount and expectations for future orders remain positive. Firms are also clearing their work backlogs and increasing employment. However, businesses in Scotland also saw some of the sharpest rises in business costs across the UK in the period, which are not yet being fully reflected in higher prices.
Firms responding to the Fraser of Allander Institute/Addleshaw Goddard’s Scottish Business Monitor in Q2 were also ‘cautiously optimistic’ about the economy.
Most measures in the survey had improved except employment and the proportion of businesses reporting higher costs of all types decreased.
It also shows that businesses have also become more optimistic about the future with a significant drop in the proportions concerned about economic or business uncertainty, staff availability and political uncertainty, though these remain high.
Higher wages and employee costs dominate concerns about costs over the coming six months and around one in four firms now expect moderate or strong growth in the Scottish economy in the coming year, up from one in five.
Pay settlements ahead of inflation
The labour market has proved remarkedly resilient. The number of payrolled employees in Scotland rose in June, based on experimental HMRC data, by 0.6 per cent on last year (0.75 per cent in the UK).
The claimant count unemployment rate rose slightly to 3.8 per cent, though this remains relatively low, and the number of claimants has fallen over the year.
Labour Force Survey data (which should still be interpreted with caution due to sampling constraints), shows that in the period to June the employment rate rose to 73.4 per cent, the unemployment rate remained unchanged at 4.4 per cent and the proportion of inactive people fell slightly to 23.1 per cent.
A quarter of Scottish employers reported facing recruitment difficulties.
Benchmarked against the UK, Scotland does slightly worse on all three indicators although the inactivity rate fell in Scotland in the latest quarter while rising in the UK.
The proportion of on-line job adverts returned to pre-Covid levels in July, following a spike during the pandemic, but many employers still report recruitment difficulties.
A quarter of Scottish employers reported facing recruitment difficulties in August, according to Scottish Government Business Insights and Conditions Survey, with the shortages most severely felt in construction businesses (34.8 per cent) and admin and support services businesses (33.6 per cent).
Pay continues to rise ahead of inflation across the UK, rising by 5.6 per cent on an annual basis, with upwards pressure coming from the other services sector and decreasing pay in public administration and defence (though this to some extent reflects the timing of a previous award).
Median monthly pay rose at a similar rate in Scotland in July, slightly slower than in June.
Expansion continues with outlook for modest growth
UK GDP grew for a second consecutive quarter in the period to June, expanding by 0.6 per cent. Growth was underpinned by an 0.8 per cent expansion in services while both production and construction contracted slightly. Fourteen of 20 sectors expanded in the quarter, up one.
Professional scientific and technical activities expanded driven by an 11 per cent expansion in scientific research and development output while information and communications was the second largest contributor to growth in Q2.
In contrast, manufacturing output fell including transport equipment with one possible reason the repurposing of capacity ahead of electric vehicle production.
Scottish onshore GDP expanded by 0.6 per cent in the second quarter of this year, following 0.5 per cent growth in Q1.
Both services and production expanded with business services and finance accounting for two thirds of the growth. In response to these figures EY has revised up its outlook for Scottish growth in its August ITEM Club forecast. It now expects Scottish GDP growth of 0.9 per cent for 2024 rising to 1.7 per cent in 2025 and 1.6 per cent the following two years.
The expansion in UK GDP of 0.6 per cent in Q2 puts it ahead of the Eurozone (0.3 per cent) and Germany (-0.1 per cent) but slightly behind the US (0.7 per cent). The updated IMF (0.7 per cent) and OECD (0.4 per cent) forecasts for the UK put the UK in the bottom half of the growth table for G7 countries in 2024.
Analysis of the data since before the pandemic suggests UK GDP is now 2.3 per cent higher than at the end of 2019, while in the US it is 9 per cent and in the Eurozone 4 per cent higher.