Economic commentary

• Business activity rose across most major global economies in March, except Japan. Service sector performance was stronger; manufacturing contracted in the UK, Eurozone and Japan. 
• The UK economy grew by 0.5% in February, following no growth in January. Output was up in services (+0.3%), construction (+0.4%) and production (+1.5%). 
• KPMG cut their UK GDP growth forecast to just 0.8% for both 2025 and 2026. The introduction of US import tariffs and a rising business tax burden (employer NI contributions) are expected to weigh on UK activity. 
• Business output rose in only five UK regions and nations in March, with Scotland among the worst performers as economic uncertainty and inflationary pressure impacted activity. 
• UK consumer price inflation rose by 2.6% over the year to March, down from 2.8% in February, and remaining above the Bank of England’s target of 2%. 
• The Scottish economy grew by 0.3% in January, following +0.5% in December. Output expanded in services (+0.5%) but contracted in construction (-0.2%) and production (-1.0%). 
• 28% of Scottish businesses reported an increase in monthly turnover in February whilst 23% reported a decrease, the first ‘positive turnover balance’ in five months. However, the proportion reporting concerns about taxation, falling demand and competition is increasing. 
• There are signs that the labour market is cooling as the number of payrolled employees decreased by 11,000 (-0.4%) over the year to March (the fourth consecutive monthly fall). However, 26% of businesses continue to report worker shortages. 
• 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. Most Scottish Enterprise customers won’t be affected by US import tariffs as this is not a major market for them, and those that will are largely adopting a ‘wait and see’ approach. 
• The Fraser of Allander Institute is forecasting GDP growth of 0.9% in 2025 and 1.1% in 2026. The Institute highlights that global economic fragility (including US tariffs), tighter UK fiscal policy, and lingering inflationary pressures are weighing down on growth.

Global/UK

Globalopens in a new window business activity expanded again in March. Across major economies, the service sector is posting stronger performance than manufacturing. However, businesses optimism has fallen to a six-month low, and input costs are rising.

Business activityopens in a new window rose across the UK as a whole in March but growth was concentrated in 5 UK nations/regions. Scotland had the second worst performance, as activity fell for the fourth consecutive month. Inflationary pressures remain elevated, and business operating costs increased at the quickest rate in 21 months (rising labour costs a driver).

UK GDPopens in a new window grew by 0.5% in February, following no growth in January. Output was up in services (0.3%), construction (0.4%) and production (1.5%). In the three months to February, GDP was up 0.6%.

Annual consumer price inflationopens in a new window rose by 2.6% in the year to March 2025, down from 2.8% in February but still above the Bank of England’s target (2%). The largest downward contributions came from recreation and culture, and petrol/diesel while clothing and footwear were the largest upward contributors.

Scotland

The Scottish economyopens in a new window grew by 0.3% in January, following +0.5% in December. Output expanded in services (+0.5%) but contracted in construction (-0.2%) and production (-1.0%). In the three months to January, GDP grew by 0.5%.

A third of businesses are optimisticopens in a new windowabout their performance over the next 12 months. This compares with 12% who expect performance to decrease. Expectations differ by sector, with Information & Comms being most positive and Accommodation & Food least.

In February, 28% of businesses reported an increase in monthly turnoveropens in a new window, (+9ppts since January), whilst 23% reported a decrease, the first ‘positive turnover balance’ in five months. Cost of labour and economic uncertainty are the main challenges impacting turnover.

Excluding staffing issues, the main business concernsopens in a new window are taxation, falling demand, and competition. An increasing proportion of businesses are also reporting rising input prices, driven by higher labour, raw material and energy costs. 

Over recent months, the proportion of businesses with no or less than 3 months cash reservesopens in a new window has been generally rising (30% in March), with the proportion with 6 months+ reserves falling. This suggests that an increasing proportion of businesses are facing financial stress.

Scotland’s unemployment rateopens in a new window remained at 4.2% (UK: 4.4%) over the year to February. The employment rate increased by 0.5ppts to 74.3%, below the UK (75.1%); economic inactivity was down 0.5ppts to 22.4% (UK: 21.4%). Median monthly pay increased by 5.3% in the year to March (UK: 4.8%).

Although 68% of businesses expect staffing costs to increaseopens in a new window in the next three months, there doesn't appear to be an appetite to cut jobs as a higher proportion of businesses (19%) are thinking of increasing rather than reducing (14%) staff numbers.

There has also been a rise in the proportion of businesses reporting worker shortagesopens in a new window – rising from 23% in February 2025 to 26% in March 2025. Despite this, signs of a cooling labour market can be seen in the payrolled employee numbersopens in a new window which decreased in March by 11,000 (-0.4%) Vs the previous year.

Based on feedback from Scottish Enterprise customers: April 2025

General sentiment

Scottish Enterprise customers are generally optimistic about their own performance but less confident in wider economic conditions.

Challenges continue with staffing and recruitment, rising costs and access to investment funding, particularly for early-stage businesses.

Labour and skills

Businesses continue to face skills shortages, with demand highest for roles that are required across multiple sectors (e.g. engineers, data analysts).

Some businesses are positively addressing skills shortages e.g. setting up in-house skills academies and working with universities to offer placements to students/graduates.

Capital Investment

Businesses are keen to invest in capital (e.g. new machinery, upgrading or new buildings) as well as in staff training and development.

However, given current heightened economic uncertainty, they are cautious about investing and reluctant to take on debt.

Tariffs

While most Scottish Enterprise customers won’t be significantly impacted by the rise in US import tariffs (as this is not a major market), those that will are largely adopting a ‘wait and see’ approach.

Some businesses with stock already in the US are pausing further shipments of their products until they know more.

Where companies are affected, expected impacts include price increases for US consumers, reduced profitability (e.g. if they lower prices to offset tariffs), and future US export projects or initiatives postponed.

Cost of doing business

Businesses in lower paid sectors and those that tend to be more labour intensive remain concerned about increased labour costs (employer national insurance contributions and wages).

Some businesses are reporting rising raw material input costs (e.g. ingredients for Food & Drink). Although they try to absorb higher costs, in some cases they are passed on to consumers.

Net Zero

Larger businesses are generally more proactive in developing and implementing net zero and sustainable practices. Smaller businesses find this more challenging due to a lack of in-house expertise.

Energy Transition

Some Oil & Gas supply chain businesses are exploring how their products and services are relevant for the renewable energy sector. Where products need little or no adaptation, businesses are much more likely to focus on securing new renewable energy customers.

However, one of the main barriers to entering the renewables sector is a lack of knowledge around what demand there is, and this makes many businesses reluctant to diversify when they have an established customer base and strong order book already.

Access to finance

For smaller start-ups who don’t have internal company funds to invest, access to finance can be a barrier; the overall funding environment is challenging as investors are generally becoming more risk averse; competition for funding is high; and raising investment is very time consuming for businesses without dedicated staff to do this.

Exporting

As overseas consumers cut back on spending, sectors such as Food & Drink are experiencing reduced export demand (e.g. for whisky). As a result, some exporters are scaling back on marketing activities in markets that are not considered core, and instead are taking a more targeted approach.

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.