The Scottish economy has continued to demonstrate resilience despite a “challenging and uncertain” global environment, according to the latest Fraser of Allander Institute quarterly economic commentary. The report reflects a “stronger than expected” economic performance, even amid ongoing tensions in the Middle East.
Revised GDP Growth Forecast
The economic researchers have revised their forecast for Scottish GDP growth in 2026 upwards from 0.9% to 1.0%. This revision comes after a stronger-than-expected performance in the first four months of 2026, highlighting the resilience of households and businesses.
Labour Market Softening
However, the commentary also notes significant risks remain. Labour market indicators point to a softening in economic conditions, with employment falling and both unemployment and economic inactivity increasing in the first quarter of 2026. This suggests caution is warranted despite the positive growth figures.
Inflation and Energy Costs
Inflationary pressures have eased in recent months, but the effects of rising energy costs are having a delayed response. While fuel and transport costs are already visible in the data, household gas and electricity bills are likely to show a clearer impact from July, when the Ofgem price cap rises.
Middle East Risks
Institute director Professor Mairi Spowage said: “It is encouraging to see the Scottish economy continuing to grow despite a challenging and uncertain global environment. The stronger-than-expected performance in the first four months of 2026 has led us to revise our growth forecast upwards, demonstrating the resilience of households and businesses alike.” She added: “However, it is too early to conclude that these challenges have passed. The conflict in the Middle East continues to create uncertainty for businesses and policymakers, while recent labour market data suggest some softening in hiring activity.”
Strait of Hormuz Concerns
Prof Spowage said the longer the disruption in the key Strait of Hormuz shipping passage continues, the greater the risk of a “more prolonged impact”. She stated: “Energy markets and the normalisation of activity through the Strait of Hormuz will remain important indicators to watch over the coming months. The longer disruption persists, or the more frictions there are in the movement of oil and gas, the greater the risk of a more prolonged impact on activity and prices. While the recent growth figures are welcome, the outlook remains uncertain and a degree of caution is still warranted.”
