The latest figures from the Fraser of Allander Institute show limited improvement to economic and business conditions in Scotland so far this year, as firms across the country brace for upcoming cost pressures.

The Institute’s economists have downgraded their forecast for 2025 and 2026 to reflect economic conditions in the UK and the world economy. The organisation’s latest Economic Commentary predicts that growth in 2025 will be similar to that in 2024 at 0.9% before increasing to 1.1% in 2026.

While GDP in Scotland and the UK grew in 2024, the outlook among businesses remains pessimistic, with almost half (46%) of firms reporting a weak outlook for growth as of Q4 2024.

Although inflation unexpectedly fell to 2.8% in February, offering some relief to households and policymakers, services inflation remains high at 5%, meaning the Bank of England is likely to remain cautious in cutting interest rates over the rest of the year.

Added to that, changes to UK employers’ National Insurance contributions, coming into effect as of April, are expected to raise costs for employers, and are already weighing on business sentiment.

Data from the Fraser of Allander Institute’s latest Scottish Business Monitor shows that 94% of Scottish firms expect these pressures to increase costs in the first half of 2025, with more than 45% of businesses reporting that National Insurance rises will substantially affect them.

“Economic conditions in 2025 are turbulent and uncertain, and are likely to remain so throughout the year. Therefore, the picture is still one of subdued growth,” said Professor Mairi Spowage, director of the Institute.

“Added pressures from National Insurance changes and geopolitical instability risk dampening confidence and growth further. 

“These tax changes will start to hit businesses next week, with many scaling back plans for workforce expansion and recruitment as a result.”

The commentary also reflects on the UK Chancellor’s Spring Statement, which the Institute said contained significant fiscal policy announcements despite the UK Government’s efforts to downplay its importance. 

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Cuts to departmental budgets and reforms to disability benefits signal tougher times ahead for devolved budgets, with the cuts announced to departmental budgets at UK Government level signalling reductions in funding for the Scottish Government relative to what was included in previous forecasts.

The Institute claims that of particular significance are the £200 million and £435 million cuts in implied funding for the Scottish Budget in 2028-29 and 2029-30.

João Sousa, deputy director of the Fraser of Allander Institute, said: “The Spring Statement had clear implications for Scotland.

“Although there is a modest short-term funding increase, the medium-term outlook is significantly more challenging, with Holyrood’s budget for day-to-day spending expected to be nearly £900 million worse off by 2029-30.

“We’ll learn more about what this means for Scotland when the Scottish Fiscal Commission publishes its next forecast in May, but it’s certain to be another significant pressure on the Scottish Government’s desk.”