Scotland’s Economic Landscape at the Close of 2024

The upcoming two-week period, marked by a lack of new economic data, offers a respite during the festive season. This pause is likely to be particularly welcomed by Sir Keir Starmer and Rachel Reeves, as the Prime Minister and Chancellor conclude the year, six months after Labour’s election victory, facing a challenging array of recent economic figures. This report will examine the current economic standing from a Scottish viewpoint as the year draws to a close. Consumer price inflation, which peaked above 11% just over two years ago, had decreased to 4% by the beginning of this year. The target for price inflation, measured over the preceding 12 months, is set at 2%. The inflation rate dropped below this target in September of this year, suggesting it had been brought under control, partly due to increased interest rates. However, subsequent monthly data from the Office for National Statistics (ONS), covering the entire UK, revealed inflation rising to 2.3% and then 2.6% in the year leading up to November. While closer to the target, underlying pressures indicate it is not yet fully subdued. While individuals generally desire faster pay increases, excessive wage inflation can contribute to higher consumer prices within the broader economy. Average weekly earnings across Britain have been increasing by over 5%, significantly outpacing price inflation. HMRC, the tax collection agency, reported that its data indicates a 7.6% rise in earnings for employees (excluding the self-employed) in Scotland within a single year. Part of this increase serves to compensate for the erosion of real spending power experienced during periods of rapid price hikes. Another contributing factor might be improved productivity, where individuals earn more by producing or adding greater value in their work. However, both the British and Scottish economies have demonstrated weak productivity growth, with the public sector experiencing a decline. Looking ahead to next year, the overall pay bill is projected to rise again, influenced by a higher minimum wage and increased employers’ National Insurance Contributions (NICs). Some of these additional costs are expected to be passed on to consumers through higher prices, while also potentially moderating future pay increases and reducing business profits. The elevated cost of employment, driven by higher NICs, has weakened the labour market. The number of advertised job vacancies, which reached high levels post-pandemic, has since decreased. The UK unemployment rate has seen a slight uptick. Nevertheless, the reliability of these figures has become a concern, particularly for individual nations and regions. The sample size of the Labour Force Survey is currently insufficient to draw definitive conclusions at levels below the UK aggregate. A significant factor influencing government policy is the concern regarding a substantial number of individuals who are unemployed due to long-term illness, many of whom express a desire to return to work. However, clear supporting data for this trend is lacking. The ONS is attempting to rectify this through revised sampling techniques, but progress is gradual. Two reductions during 2024 have lowered interest rates from a 16-year peak of 5.25% to 4.75%. The monetary policy committee of the Bank of England, comprising nine economists, is tasked with achieving the 2% inflation target. However, the committee must exercise caution to avoid stifling investment, consumer spending, and overall economic activity, which could lead to a recession. It has expressed concern over the persistent high rate of core inflation, which excludes volatile components. The committee is also attentive to service sector price inflation, viewing it as an indicator of ongoing domestic price pressures rather than price increases stemming from international factors. This context helps explain the committee’s decision last week to maintain its base interest rate at 4.75%. Andrew Bailey, the Bank of England’s governor, indicated that further rate cuts are probable, but cautioned against expectations of them occurring rapidly. Economists within central banks are also apprehensive about the potential economic repercussions if Donald Trump were to return to the White House and implement tariffs on goods imported into the USA. Such actions would likely exacerbate American inflation and could trigger a ripple effect globally. As a consequence of expectations that interest rates will remain elevated for a longer duration, the cost of fixed-term borrowing, frequently utilized for mortgages, has increased. The most recent assessment of the Scottish economy indicated a 0.2% contraction in economic output during October. From August to October, the Scottish economy is estimated to have experienced no growth. The corresponding UK figure for October showed a 0.1% contraction. This economic performance may have been influenced by the pessimistic communications from Downing Street regarding public spending and taxation, as well as the anticipation of Rachel Reeves’ Budget statement on 30 October. Following its announcement, the Budget impacted businesses more severely than anticipated, with survey data suggesting it exerted downward pressure on investment and recruitment. The Bank of England operates a network of ‘agents’ across the UK who provide its headquarters with insights into national business conditions. Research summarized last week stated: “Across a range of sectors, firms report that the increase in NICs will have a substantial impact on their total labour costs.” This impact was largely unforeseen, particularly the change in thresholds, which will disproportionately affect businesses employing a high proportion of part-time or low-paid workers. Businesses are currently strategizing on how best to address this situation. “Potential actions cited include reducing labour input by reducing headcount or hours worked or accelerating investment in efficiencies/automation. Others are considering offshoring labour.” Does a lack of economic growth matter? Yes, the economy relies on growth momentum to continuously generate employment and to accrue sufficient funds to import desired goods and services. Furthermore, growth is crucial because expanding output translates into increased activity, more jobs, higher overall income, and consequently, greater tax revenue. Both the Scottish and UK governments are in significant need of additional tax revenue to fulfill their ambitions for public services and welfare. An often-overlooked yet vital component of the economy, housing costs, have been rising at a faster pace than general consumer costs. According to the official Registers of Scotland, the average cost of purchasing a home in Scotland increased by £10,000 in the 12 months to October. This represented a 5.5% rise, indicating faster house price inflation than in any region of England or Wales. The average price in Scotland is just under £200,000, while the average UK price is nearly £100,000 higher. Given Scotland’s distinct system for house purchases, different market pressures are at play. Expectations of declining mortgage interest rates have contributed to price increases throughout 2024. Additionally, both the Scottish Parliament and several councils have declared a housing emergency, which is linked to the volume of new homes being constructed. The Scottish government’s financial contribution towards this during the current fiscal year was significantly reduced. The cost of a new private tenancy in Scotland also increased at a rate exceeding consumer price inflation, rising by 6.5% in the 12 months to November. This amounted to an average monthly rent increase of £59, bringing it close to £1000 per month. This rate of rent increase is slower than that observed in other parts of the UK and represents a decrease from the rises seen in the summer of 2023. Housing, along with the cost of heating homes – which is also set to increase with the new year – continues to represent one of the primary expenses for Scots.