Economic Commentary – January 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.

Economic output contracted across all major economies in December as high inflation, conflict in Ukraine and supply chain challenges all weighed on economic performance. However, inflation has started to ease across most economies. The World Bank is forecasting a sharp, long-lasting slowdown, with global growth declining to 1.7% in 2023, a significant drop from the 3.0% expected just six months ago. In the three months to November, UK GDP contracted by 0.3%. There was a 0.1% fall in services, a 1.4% fall in production, with the only growth coming from construction, which increased by 0.3%. Business surveys for December show UK private sector activity falling, with signs that the economic slowdown is hitting a growing number of local labour markets. Inflation in the UK continues to be high (10.5% in the year to December). To help combat rising prices, the Bank of England raised interest rates to 3.5% in December. The Scottish economy contracted by 0.1% in the three months to October and grew by 0.4% in October, driven by increased service sector (+0.3%) and construction output (+0.9%), offsetting a 0.3% fall in manufacturing. More recent data show that business activity declined in December (for the fifth month in a row) as demand shortfalls continued to lead to a decrease in new orders. Factors such as the war in Ukraine, a slowdown in the housing market and inflation weighed heavily on business confidence. Unemployment in Scotland remains low; however, wages are failing to keep pace with inflation despite an increase in median earnings. Scottish businesses across all sectors continue to report widespread inflationary pressures and recruitment difficulties; this is impacting the ability of some businesses to meet demand. The Scottish Fiscal Commission is forecasting 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.

This paper makes no recommendations.