The UK economy shrank by 0.1% in May, confounding expectations of modest growth and raising fresh concerns among Scottish businesses already grappling with fragile confidence and global trade headwinds.
Scottish business leaders have responded with a renewed sense of caution. According to the latest Scottish Economic Bulletin, “businesses remain concerned about weakening demand and a further fall in consumer sentiment in April highlights the risk that rising global economic uncertainty translates into weaker domestic spending.”
The bulletin notes that while Scottish GDP grew 0.4% in the first quarter of 2025, the outlook has dimmed amid persistent trade and inflationary pressures.
The RBS Growth Tracker reported that “business activity in May increased for the first time in six months, albeit the pick-up was marginal and indicators of new business orders remain slightly in negative territory. This reflects that while activity and output have improved, weakening demand remains a key concern for business.”
The Scottish economy’s reliance on manufacturing and exports – particularly whisky – makes it more vulnerable to international shocks.
The Scottish Fiscal Commission recently downgraded its GDP growth forecast for 2025 to 1.1%, citing “ongoing developments in international trade policy which have created significant uncertainty and volatility”.
Ernst & Young’s latest forecast echoes this, describing the Scottish economy 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 Economic Bulletin highlights that “taxation remains the main concern for businesses in May following the introduction of the rise in employer NICs, alongside falling demand for goods and services, though the recent increase in both labour and broader input costs is also adding to business cost pressures.”
Despite the economic headwinds, Scotland’s labour market has shown some resilience. Employment rose to 74.5% in early 2025, with unemployment at 4.3%.
However, the long-term stagnation in real wages remains a concern. Analysis from Future Economy Scotland shows that “over the past 16 years real wages in Scotland have increased by just 1%, lower than the UK average of 1.7%.”
While some indicators suggest a marginal improvement in business activity, Scottish firms remain cautious.
The Scottish Fiscal Commission warns that in a scenario of further global trade disruption, “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”.
Professor Joe Nellis, economic adviser at accountancy and advisory firm MHA, commented:
“Just as last year, we now wait tentatively for the Autumn Budget to find out how the Chancellor aims to solve her fiscal problems.
The Chancellor has repeatedly reaffirmed her fiscal rules, preventing her from borrowing more to finance day-to-day spending. This makes increased borrowing (unless for investment spending) unlikely.
That leaves taxes. We are now likely to see tax rises in the Autumn Budget; the question remains of which taxes? The freeze on income tax thresholds will be extended, effectively raising taxes by not aligning tax brackets with inflation. A tax on wealth has been posited as a potential solution to the economic malaise, but this will only accelerate the exodus of high earners from the UK and will not increase overall tax revenues. Whatever the Chancellor decides, an increasing tax burden is unlikely to encourage economic growth.”
Nicholas Hyett, Investment Manager at Wealth Club, commented:
“Higher living wages and employers national insurance may already be hurting labour intensive industries like retail and leisure. Despite markets hitting record highs, the macro-economic picture is uncertain and taxes look set to rise substantially at the next budget.
Both weather and markets may be stuck on hot, but ultimately it’s the economy that matters and if cooling turns to economic deep freeze you might see the government start to sweat.”
