Scots growth downgraded as inflation jumps – Daily Business

Mairi Spowage: renewed shock (pic: DB Media Services)

Scotland’s economy is expected to grow more slowly as a result of ongoing geopolitical tensions, according to a key forecaster.

The Fraser of Allander Institute has downgraded its 2026 forecast from 1.1% in February to 0.9%, though it says growth expectations remain positive over the medium term, with GDP growth forecast at 1% in 2027 and 1.1% in 2028.

The latest forecast comes as the Office for National Statistics says UK inflation jumped to 3.3% in the year to March from 3% in the 12 months to February.

Fraser of Allander says that recent economic indicators suggest the Scottish economy has maintained momentum, but adds that the full effects of geopolitical disruption often emerge gradually, as pressures feed through energy markets and prices.

Mairi Spowage, director, said: “While recent indicators have encouraged a more optimistic narrative around Scotland’s growth prospects, it would be premature to assume this momentum is secure.

“The conflict in the Middle East reminds us how quickly geopolitical risk can translate into economic pressure, particularly through energy markets.

“At a time when UK inflation had begun to stabilise and the economy was showing signs of recovery after several challenging years, this renewed shock means the outlook remains highly uncertain, with many of the potential impacts yet to be fully reflected in the data.

“The experience following Russia’s invasion of Ukraine in 2022 should remain fresh in our minds. That period demonstrated how prolonged disruption to oil and gas markets can drive inflationary pressures, tighten financial conditions, and ultimately weigh on economic growth.

“The lesson for Scotland is not that a downturn is inevitable, but that today’s positive outlook must be approached with caution.”

Although inflation has risen above the Bank of England’s 2% target, it remains well below the 11.1% high reached in October 2022 after Russia’s full-scale invasion of Ukraine – the highest rate for 40 years.

On today’s data, Chancellor Rachel Reeves, said: “This is not our war, but it is pushing up bills for families and businesses. That’s why it’s my number one priority to keep costs down.”

Mike Randall, CEO at Simply Asset Finance, said: “An uptick in headline inflation suggests geopolitical tensions are beginning to feed through to costs and supply chains – but will hopefully be short-lived, and not the start of a more persistent trend.

“This news could delay future rate cuts, putting pressure on borrowing costs and tightening margins for SMEs. But with the right access to finance – there is still room for businesses to invest and grow.”

Luke Bartholomew, deputy chief economist, at Aberdeen Group, said: “Today’s data was always going to show an energy price driven jump in headline inflation.

“The market will take some comfort that the increase in inflation was no greater than had been expected, while measures of underlying inflation were more mixed, with core softer but services inflation elevated.

“Inflation is set to rise further from here once the impact on household energy bills is felt after the Ofgem price cap re-set in July. Policymakers will be much more focused on whether higher energy prices start to contaminate a broader range of prices.

“Certainly inflation expectations are likely to remain elevated, but with the labour market and broader economy relatively weak, it is hard to see workers and firms having much power to gain higher wages and push through higher prices in response.

“That should ultimately limit the size and extent of the coming inflation shock. For now, though, the Bank of England is likely to remain in wait-and-see mode, keeping policy on hold next week and maintaining maximum optionality about whether interest rates ultimately end up increasing or decreasing later this year.”

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