Economic commentary
Our regular update on global, UK and Scottish economic trends and performance, drawn from a wide range of economic indicators and commentaries. Published June 2025.
Summary
- Business activity rose across most major economies in May, except China. Service sector performance was generally stronger while manufacturing declined in the UK, Eurozone and Japan.
- UK GDP contracted by 0.3% in April, following growth of 0.2% in March. Output was down in the service (-0.4%) and production/manufacturing sectors (-0.6%), while the construction sector grew (+0.9%). Over the longer term, in the three months to April, GDP was up 0.7%.
- Business activity rose across the UK as a whole in May with half of nations/regions growing and half contracting. All regions saw an increase in growth expectations in May Vs April as levels of uncertainty eased.
- UK consumer price inflation rose by 3.4% over the year to May, down slightly from 3.5% in April, but remaining above the Bank of England’s target of 2%.
- The Scottish economy contracted by 0.2% in March, following -0.2% in February. Output expanded in construction (+0.3%), flatlined in services (0%) but contracted in production/manufacturing (-1.6%). In the three months to March, GDP grew by 0.4%.
- 25% of businesses reported an increase in monthly turnover in April (down from 41% in March) while 27% reported a decrease (vs 12% in March). The cost of labour was the most significant ‘turnover challenge’ reported, likely due to the increased employer NI contributions introduced in April.
- The labour market continues to cool as the number of payrolled employees decreased by 23,000 (-0.9%) over the year to May (the sixth consecutive monthly fall). 22% of businesses continue to report worker shortages but the proportion has been falling since March.
- Scottish Enterprise customers are generally optimistic about their own performance but are expressing less confidence in the wider economy, particularly due to the global economic environment. Energy supply chain companies are increasingly nervous about the sector which they report as slowing down domestically and some are looking to other markets and sectors for orders.
- The OECD is forecasting global GDP growth of +2.9% in 2025, a downgrade of -0.2ppts. The World Bank also downgraded its forecast and are predicting global growth of 2.3% in 2025, the slowest rate since 2008.
- The Scottish Fiscal Commission has downgraded its GDP growth forecast for 2025 to 1.1% due to ongoing developments in international trade policy which have created significant uncertainty and volatility. Growth of 1.8 is forecast for 2026.
Recent economic data
Global/UK
Global business activityopens in a new window expanded again in May. Across major economies, the service sector is posting stronger performance than manufacturing. Business optimism picked up after sinking in April to its lowest level since May 2020.
Business activityopens in a new window rose across the UK as a whole in May with half of nations/regions growing. All areas saw an increase in future growth expectations as levels of uncertainty eased. Business activity in Scotlandopens in a new window rose for the first time in six months, although marginally.
UK GDP contracted by 0.3% in April, down from growth of 0.2% in March. Output fell in both services (-0.4%) and production/manufacturing (-0.6%) but grew in construction (+0.9%). In the three months to April, GDP was up 0.7%.
Annual consumer price inflationopens in a new window was 3.4% in the year to May 2025, down slightly from 3.5% in April but still above the Bank of England’s 2% target. The largest downward contributions came from transport while the largest upward contributions were from food, furniture and household goods.
Scotland
The Scottish economyopens in a new window contracted by 0.2% in March. Output was up in construction (+0.3%) and flatlined in services (0%), but fell in production (- 1.6%). Electricity and gas along with IT services were the largest downward contributors. In the three months to March, GDP grew by 0.4%.
25% of businesses reported an increase in monthly turnoveropens in a new window in April (down from 41% in March) while 27% reported a decrease (vs 12% in March). The cost of labour was the most significant ‘turnover challenge’ reported, likely due to the increased employer NI contributions introduced in April.
Falling demand for goods or services is the biggest concernopens in a new window that businesses are highlighting (17%), followed by taxation, competition and worker shortages.18% of businesses reported no concerns in June.
11% of businesses reported being impacted by the rise in US import tariffsopens in a new window in May, rising to 27% of manufacturers. Of those impacted, 57% cited additional costs, 31% supply chain disruptions and 26% reduced demand. 13% of all businesses expect higher US tariffs to impact their business in the future.
Input costsopens in a new window have been rising for Scottish businesses since December 2024 and in April, 40% reported higher costs than in March. The cost of labour was the biggest contributor to price rises followed by higher raw material costs.
The overall decline in businesses reporting worker shortages does suggest the market is cooling. This is also evidenced by the decline in payrolled employee numbersopens in a new window, down by 23,000 (-0.9%) over the year to May. Recruitersopens in a new window also reported a rise in candidate supply as a result of fewer job opportunities combined with redundancies
The proportion of businesses reporting worker shortagesopens in a new window has been dropping since March and in May 2025 reached a yearly low of 22%. This is higher for some sectors though - 37% for construction and 34% for admin. Of those businesses impacted, around 40% were unable to meet demand in May.
Scotland’s unemployment rateopens in a new window fell to 4.2% over the year to April (UK: 4.6%). The employment rate increased by 2.1ppts to 75.0%, below the UK (75.1%); economic inactivity was down 1.8ppts to 21.6% (UK: 21.3%). Median monthly pay increased by 5.3% in the year to May (UK: 5.8%).
Current business sentiment
Based on feedback from Scottish Enterprise customers: June 2025
General sentiment
Scottish Enterprise customers continue to be generally optimistic about their own performance but are increasingly nervous about wider economic conditions.
Challenges continue with rising costs (labour and inputs), staffing and recruitment and access to investment funding, particularly for early-stage businesses.
Trade Tariffs
Companies that export are continuing to do so and have largely been unaffected by tariffs. Some are exploring new markets or expanding in existing markets depending on where their products fit.
Most businesses have not been affected by tariffs directly, but for those that have, planning ahead can be challenging given policy is rapidly changing and forcing many to continue with a ‘wait and see’ approach.
Cost of doing business
Rising costs (inputs, energy and particularly labour costs) are an increasing concern, with some finding it difficult to pass higher costs onto customers, particularly where contracts have already been agreed.
Some businesses have been significantly impacted by employer NI contribution increases. Some are not replacing workers and squeezed margins means capital investment has been scaled back.
Labour and skills
Skill shortages are still an issue, especially in manufacturing and for skilled trades. Businesses are continuing to addressing shortages by training existing staff and hiring apprentices.
With labour costs higher, some businesses are reviewing their recruitment strategies and in some cases, hiring has been put on hold.
Capital Investment
Many businesses are continuing to invest and with other costs rising, they are increasingly seeking to invest in automation which offers high returns and reduces labour demand.
Access to finance
Early-stage businesses continue to report access to funding as a major barrier. Investors have increasingly tighter criteria and are favouring projects that are already delivering value. Businesses are seeking support from Scottish Enterprise to make their case for investment as robust as possible.
Net Zero
Businesses are adopting net zero actions in order to save costs (particularly energy costs). Some manufacturers are exploring the use of solar panels and heat pumps.
Workplaces
Finding suitable property for growth remains a challenge, particularly securing cost effective lab and manufacturing spaces. Some businesses are compromising on location and moving to locations out with city centres if suitable property is available.
Energy Transition
Energy supply chain companies are increasingly nervous about the sector which the report as slowing down. While most haven’t so far reported decreased orders, some are looking at overseas markets such as South America where they can export their goods and services.
Some are looking at how they can diversify more quickly into renewables but market opportunities are not at the scale they need, and significant barriers still remain (e.g. a lack of understanding on how their products can be used or adapted for renewable uses).
Some are looking at alternative markets other than renewable energy) to keep order books full while the sector is still developing.
Forward look
Global forecasts
The OECDopens in a new window has downgraded its global growth forecast to +2.9% for both 2025 and 2026. Emerging and developing economies (e.g. China and India) are generally expected to grow faster than more advanced economies. Growth has been downgraded due to a combination of factors but particularly rising trade barriers and heighted policy uncertainty.
The OECD highlights that growth is expected to remain modest as downside risks are expected to intensify, including:
- further escalations or sudden shifts in trade policies which could push
up inflation. - more cautious behaviour from consumers and businesses.
- tighter financial conditions (e.g. a reduction in spending and increased
taxation)
The World Bankopens in a new window has also significantly downgraded its growth projections forecasting global growth of 2.3% in 2025 (the slowest growth since 2008) and 2.4% in 2026. Growth is expected to slow as a result of; trade barriers and increased policy uncertainty
Scottish forecasts
For Scotland, Ernst & Youngopens in a new window have downgraded GDP growth forecasts to 0.6% for both 2025 and 2026 (Vs the UK at 0.8% for 2025 and 0.9% for 2026).
The reasons for the downgrade echo those outlined by the OECD with the Scottish economy described as fragile, exacerbated by the US’s tariff announcements, which has dampened business and consumer confidence. Rural areas (whisky producing) are expected to be impacted most negatively.
The Scottish Fiscal Commissionopens in a new window has also downgraded its GDP forecast to 1.1% for 2025, followed by +1.8 in 2026, again due to ongoing developments in international trade policy which have created significant uncertainty and volatility.
Scotland’s unemployment rate is expected to gradually rise from 3.7% in 2024 to 4.1% by 2027 as labour market tightness eases.
The SFC also modelled an alternative ‘trade tariff scenario’ where the level of Scottish GDP could be 0.4% lower than their central forecast for 2025/26 assuming a short-term rise in inflation, and decreases in household consumption, business investment and exports as a result of universal US tariff increases and no retaliation.
You can download the full economic commentary document here (PDF, 429 KB) opens in a new window
Impacts of US tariffs on businesses and the economy
An uncertain economic environment is posing significant risks to global economic growth.
Many forecasters are downgrading their expectations, including KPMGopens in a new windowwho cut their UK GDP growth forecast to 0.8% for 2025 and 2026, as the introduction of US import tariffs (and a rising UK business tax burden) are expected to weigh on performance.
KPMG have also modelled a number of US tariff impact scenarios for the global economy, and GDP growth could slow by anything up to 1.5ppts.
For Scotland, the Fraser of Allander Instituteopens in a new window has cut its GDP growth forecast for 2025 to 0.9% to reflect ongoing concerns over global economic fragility, tighter UK fiscal policy and lingering inflationary pressures.
How could tariffs impact Scotland's businesses and economy?
US import tariffs could lead to both negative impacts and potential opportunities for Scottish businesses and the economy.
Potential Negative impacts
- Slower global growth/weakening demand: US tariffs and potential retaliation would slow global economic growth, weakening demand for Scottish goods/services in export and domestic markets.
- Scottish exports could cost more/less competitive in the US: Lower exports sales would have a negative impact on business growth.
- A fall in business and consumer confidence would lead to reduced demand for Scottish products/services as consumers reduce spending. Businesses may pause or scale back capital investment/growth plans.
- Supply chains: US customers may consider substituting Scottish suppliers for US-based ones.
Potential opportunities
- Potential tariff differential: some tariff differentials could work in Scotland’s favour (e.g. 10% vs 25% for Canada) and there might be opportunities to exploit this in the US as a relative price advantage.
- Anti-US product sentiment: where Scotland has products that are good substitutes for US products, anti-US sentiment in global markets provides opportunities for Scottish businesses.
- Product substitution in supply chains: global supply chains that include US businesses may face higher costs from tariffs (e.g. if there are cross border movements of components). Scottish suppliers may have opportunities to replace US businesses in supply chains.
- Global investment flows (including inward investment): increased trade and geopolitical uncertainty prompting UK/Scottish businesses to re-shore activities. The UK may become more attractive for investment if US tariffs are lower than for other countries, offering an opportunity for Scotland.
-
Sign up to email updates
Subscribe to our newsletter to hear about new business guides, case studies, events and industry updates.
Need help to grow your business?
Get in touch with our advisers for tailored support.