Economic commentary

• Global business activity further expanded in September (for the 32nd consecutive month, though at a slower pace), with the service sector outperforming manufacturing. Year-ahead business optimism also improved, reaching a seven-month high.
• UK GDP grew by 0.1% in August, following a contraction of 0.1% in July. Output expanded in production (0.4%), while services showed no growth and construction fell by 0.3%. In the three months up to August, GDP was up by 0.3%.
• Business activity rose in just 3 of the 12 UK nations or regions in September. Most areas recorded lower levels of new business, as well as continuing cost pressures.
• UK consumer price inflation was 3.8% in the year to September. This was unchanged from August's rate and still above the Bank of England’s 2% target. Producer input prices rose by 0.8% in the year up to September 2025.
• The Scottish economy contracted by 0.3% in July following growth of 0.7% in June. During the month, output was down in production (-2.3%) but up in services (+0.1%) and construction (+0.2%). In the three months leading up to July, GDP is estimated to have grown by 0.5%.
• 24% of Scottish businesses reported an increase in their monthly turnover in August, while 22% reported a decrease. The cost of labour was the most significant turnover challenge.
• Scotland’s labour market continues to cool. The number of payrolled employees decreased by 10,000 (-0.4%) over the year leading up to September (the 10th consecutive monthly fall).
• The top business concerns for Scottish businesses are falling demand and UK competition. Looking ahead, 30% have concerns about their supply chains.
• More Scottish businesses continue to report a fall in new capital investment. Uncertainty about demand and a shortage of internal finance are the main factors holding back investment.
• Overall, Scottish Enterprise customers are reporting lower levels of positive business sentiment, mostly due to economic uncertainty, financial pressures, and difficulty accessing finance.
• The IMF forecasts global economic growth of 3.2% in 2025, easing slightly to 3.1% in 2026.
• The British Chamber of Commerce is forecasting UK GDP growth of 1.3% in 2025 and 1.2% in 2026. The Fraser of Allander Institute forecasts slightly weaker Scottish growth of 1.0% in both 2025 and 2026.

Global/UK

Global business activity expandedopens in a new window in September, with services outperforming manufacturing. Year-ahead business optimism rose to a seven-month high and the rates of increase in input and output costs eased slightly.

Business activity roseopens in a new window in just 3 out of 12 of the UK nations and regions in September (down from 10 in August), with most areas recording lower levels of new business and continued cost pressures. Activity in Scotland fellopens in a new window due to economic uncertainty, weak demand, and cost pressures.

UK GDP grewopens in a new windowby 0.1% in August, following a contraction of 0.1% in July. Output in production increased by 0.4%, but services showed no growth and construction fell by 0.3%. In the three months leading up to August, GDP was up by 0.3%.

Annual consumer price inflationopens in a new window was 3.8% in the year leading up to September. This was unchanged from August's rate and still above the Bank of England’s 2% target. The largest upward contribution was from transport. Producer input prices rose by 0.8% in the year leading up to September, which was up from 0.2% in August.

Scotland

The Scottish economy contractedopens in a new window by 0.3% in July, after growing 0.7% in June. In the three months leading up to July, the GDP is estimated to have grown by 0.5%, which is below the UK level. During the month, output was down in production (-2.3%) but up in services (+0.1%) and construction (+0.2%).

24% of businesses reported an increase in monthly turnoveropens in a new window in August (down from a high of 41% in March), and 22% reported a decrease. The cost of labour was the most significant turnover challenge reported, alongside competition and the cost of materials. Despite these challenges, 17% of businesses (and 35% of large businesses) expect their turnover to increase in October.

The top concerns for businessesopens in a new window remain falling demand for goods and services and competition from other UK businesses, although 19% reported no concerns. 30% have concerns about their supply chain in the coming year (rising to 40% among manufacturers), with increased barriers to trade, international conflict, and cyber attacks the main factors expected to impact supply chains.

In the third quarter of 2025, more businesses again reported a fall in new capital investmentopens in a new window. However, 15% expected to increase their capital expenditureopens in a new window between July and September this year (-5ppts since April), and 15% expected a decrease. Uncertainty about demand and a shortage of internal finance were the main factors holding back investment. 

Scotland’s unemployment rate fellopens in a new window 0.2ppts to 3.9% in the year leading up to June (compared to 4.8% across the UK). The employment rate increased by 1.1ppts to 74.3%, but remains below the UK's rate of 75.1%. Economic inactivity was down 1.0ppts to 22.7% (compared to 21% in the UK). Median monthly pay increased by 5.9% in the year leading up to July (compared to 5.5% in the UK).

Cost pressures for Scottish businessesopens in a new window have eased somewhat. 22% reported their input prices increased in August as compared to July (and fell 16ppts since April’s high), although that figure is 46% for accommodation and food services. 13% expect to increase their prices in October, mainly due to labour and energy costs.

The number of payrolled workers declinedopens in a new window declined again over the year leading up to September, down by 10,000 (-0.4%). In August, HR1 forms showed a significant monthly increase in jobs at risk of redundancyopens in a new window (4153 jobs in Aug, compared to July’s 1553). 21% of businesses continue to face worker shortagesopens in a new window, although the proportion has been dropping since March (-5ppts).

Scottish international goods exportsopens in a new window (excluding services) were valued at £22.3 billion in the year leading up to June 2025 – similar to June 2024's figure. The EU is Scotland’s top international goods export destination (at 38% of the total value), followed by the US (18%). The commodity category with the highest export value was drink, at £5 billion.

Based on feedback from Scottish Enterprise customers: October 2025

General sentiment

Overall, sentiment among Scottish Enterprise customers has generally gotten worse, with economic uncertainty, financial pressures, and difficulty accessing finance for investment key causes.

Long-standing challenges – for example, the costs of doing business, worker shortages, and access to investment funding – continue to make businesses cautious.

However, customers in some industries, such as creative and digital, are more optimistic due to strong sectoral demand and growth opportunities.

Cost of doing business

Many businesses continue to be negatively impacted by high costs, particularly labour costs (for example, increased employer NI contributions), especially in labour-intensive sectors such as food and drink manufacturing.

High energy and raw material costs are also cited as concerns.

Increased costs are also having knock-on effects on some businesses. For example, some are pausing investment or reducing their attendance at trade shows due to reduced budgets.

Investment and access to finance

Businesses are investing in areas such as automation with a view to increasing productivity and offsetting worker shortages.

Start-up businesses in sectors such as science and tech are looking to invest. However, it has become increasingly difficult to raise funds as investors tend to favour businesses that are already generating revenue.

Early-stage businesses are seeking investment by attending investor-related events to promote their company. However, this task usually falls to the business founder, and can be time-consuming, with no guarantee of success.

Innovation

Some businesses (in the critical technologies sector, for example) are developing new products. However, the full commercialisation journey is challenging, especially given the lack of investment funding – which is a major barrier to innovation and growth.

Labour and skills

Some businesses continue to face recruitment challenges, particularly in rural locations where there is a lack of affordable housing. Some skilled positions are very hard to fill – for example, data scientists, engineers, and leadership roles.

To address shortages, some businesses are promoting their sector as a desirable career option through school education initiatives or apprenticeship and training programmes. Others are providing staff accommodation to help tackle local accommodation shortages.

Retaining staff can be challenging, as apprentices can move on after they finish their programme. Some businesses are having to increase salaries to retain staff, which further exacerbates their cost concerns.

Net zero

For some businesses that are implementing net zero practices – such as fitting solar panels or changing packaging to reduce product weight – their primary motivation is to reduce costs, rather than emissions.

Some businesses are looking to reduce their use of fossil fuels (to reduce both emissions and costs) and are increasingly adopting biomass as an energy source. Others (for example, in the whiskey industry) are looking at how they can transform the heat produced in their manufacturing process into energy.

Energy transition

The general sentiment around renewables is somewhat cautious. Companies experience a number of barriers to entering the sector, including a lack of grid infrastructure and uncertainty around timescales and commercial viability.

Trade tariffs

Most of our customers are not impacted by the US tariffs, either because it's not a big market for them or they are service-based.

However, among those that are affected, some are considering setting up operations in the US (including both warehousing and staff). Others are looking to expand into additional markets, such as Europe and the Middle East.

Global forecasts

The IMF forecastsopens in a new window global growth to slow from 3.3% in 2024 to 3.2% in 2025 and 3.1% in 2026. Emerging and developing economies such as China and India are expected to grow faster (4.2% this year and 4.0% in 2026) than more advanced economies (1.6% in both years).

The IMF expects the UK to be the second-fastest growing economy in the G7 (behind the US) in 2025 (1.3%) and 2026 (1.3%). Global inflation is expected to fall to 4.2% in 2025 and 3.7% in 2026, but UK and US inflation is predicted to stay above target.

The IMF highlights a number of potential downside risks to the global economy:

• ongoing policy uncertainty and labour supply shocks
• climate shocks, regional conflicts, and geopolitical tensions that could lead to renewed spikes in commodity prices
• a sudden drop in tech stock prices triggered by disappointing AI-related earnings or productivity gains, which could end the current AI investment boom and destabilise financial markets

UK and Scottish forecasts

The British Chamber of Commerce is forecasting UK GDP growthopens in a new window of 1.3% in 2025 and 1.2% in 2026.

Inflation is expected to remain above target in 2025 (at 3.7%) and 2026 (2.5%), driven by business price pressures such as NI increases, wage growth, and global trade tensions. Average earnings are expected to remain above inflation.

No further interest rate cuts are expected in 2025. Instead, the interest rate is expected to remain at 4% before falling to 3.5% by the end of 2026.

Business investment is expected to be weak – growing by 1.6% in 2025 and 1.9% in 2026 – as investment plans remain subdued due to higher costs.

Exports are forecast to grow by 3.3% in 2026 – a modest increase due to global uncertainty and trade friction.

The Fraser of Allander Institute upgraded its economic growth forecastopens in a new window to 1.0% in 2025 (from 0.8%) and 1.0% in 2026. This reflects the stronger economic performance in the year to date.

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