Economic Commentary – February 2023

The Economic Commentary provides a regular update on global, UK and Scottish economic trends, drawing on recent economic data as well as feedback from businesses.

The methodology consisted of desk research.

Over the last quarter of 2022, economic growth slowed across the world’s largest economies as high inflation, the war in Ukraine and Covid outbreaks in China dampened activity. More recent business surveys reported output rising in China, Japan and the eurozone in January, but falling in the US and UK. The IMF is forecasting global growth to ease to +2.9% in 2023, before picking up marginally to +3.1% in 2024. The UK is expected to be the only major economy to shrink in 2023 (-0.6%) as higher interest rates and inflation reduce household real incomes. UK business activity declined in all UK nations and regions except London in January as high inflation and tightening financial conditions dampened demand for goods and services. The Bank of England increased interest rates to 4% in February to help combat high, although easing, inflation (+10.1% in January). It expects inflation to fall sharply to around 4% towards the end of 2023. Scotland’s onshore GDP is estimated to have fallen by -0.1% in November, after growing +0.7% in October. Output in the services sector, which accounts for around three quarters of the economy, recorded zero growth. Unemployment in Scotland remains low (3.3% over the last quarter of 2022). Rising wages (+5.5% over the year to January) are failing to keep pace with inflation. Scotland’s employment rate was 76.6% in December, and is now 1.2 percentage above the immediate pre-pandemic rate. While high employment is a positive, it is creating worker shortages for some sectors. Businesses continue to report widespread inflationary pressures and recruitment difficulties; this is impacting the ability of some to meet demand as well as affecting profits and the ability to take forward growth plans. The Scottish Fiscal Commission is forecasting that the Scottish economy will contract by 1.2% in 2023 and will not recover to its pre-recession peak until the first quarter of 2025. The Fraser of Allander Institute is expecting a contraction of -1%.

This paper makes no recommendations.