Supported by Deloitte, the report provides an in-depth analysis of key data on the UK and Scottish economies, with a significant focus on Scotland’s financial trajectory.

The Institute’s economists have revised their growth forecasts for the Scottish economy, projecting an increase of 0.5% in 2023, a significant upward shift from previous forecasts. However, the outlook for 2024 and 2025 is less promising, with growth predicted at 0.7% and 1.2% respectively. This reflects the persistent inflation issues and the Bank of England’s response of increasing interest rates, currently at 5% and almost certain to rise further.

Analysis in the Commentary this quarter includes a detailed look at the attitudes of consumers, the extent to which businesses have been absorbing cost increases as opposed to passing these on to their customers, the state of the housing and rental markets, and a special analysis of the prospects for social enterprises in our economy in these difficult times.

Professor Mairi Spowage, director of the Institute, said: “We have improved our outlook for growth in 2023 due to outturn economic data being significantly better than was expected.

“However, the increased downward pressure on demand that is going to impact growth in 2024 and maybe beyond has led us to be less optimistic about growth next year and the year after.

“Confounding our expectations, consumer spending has remained pretty resilient in the first quarter of the year. There is some evidence that this is being supported by increased borrowing, which may be a concern for the resilience of consumers as we move through the year.

“All of the evidence we have looked at in this edition would support that, in the main, businesses have been trying to absorb costs rather than pass them on to their customers. The signs are that more of them will have to pass through costs soon though which may lead to further price rises for consumers.”

Douglas Farish

Douglas Farish, office senior partner in Edinburgh and head of tax in Scotland for Deloitte, said: “While Scotland’s economic performance has exceeded expectations from just a few months ago, challenges for businesses will persist throughout this year because of ongoing high inflation and rising interest rates.

“With a still challenging economic environment, businesses are focused on costs and have remained cautious about investing. Focus must now turn to strategies to navigate the challenges that this presents.

“Tapping into the resilience developed over the last few years, while also fostering productivity and developing skills, will be essential to help mitigate the current economic climate’s impact on business operations now and over the longer term.”

The commentary also analyses some of the key headlines from the Scottish Government’s Medium Term Financial Strategy (MTFS), which set out some pretty stark challenges facing the Scottish Government in balancing their books for the next financial year.

Emma Congreve, deputy director of the Institute, said: “The MTFS set out that there is currently a £1 billion gap between the funding that the Scottish Government is expecting through the block grant and tax receipts and the money they require to meet their existing commitments.

“The Scottish Government set out that tough decisions will be required – but without setting out what would guide their decisions on where the axe would fall. Whilst this was not a budget, it is reasonable of the opposition parties to ask where savings may be found.

“What is clear is that the Scottish Government are trying to manage expectations of both those it funds and those who hold it to account – essentially saying that the budget round for 2024-25 is going to be difficult and very challenging.”