What shape is Scotland’s economy in after 2024?

One gift for the festive season is an absence of data about the economy for the next two weeks.

That will be particularly welcome for Sir Keir Starmer and Rachel Reeves.

The prime minister and chancellor have reached the end of the year, and the six-month mark since Labour’s election victory, with an unwelcome set of recent economic data.

So let’s review where we have got to, from a Scottish perspective, as we near the end of the year.

The rate of increase of consumer prices peaked above 11% just over two years ago and had fallen to 4% at the start of this year.

The target level for price inflation, measured over the preceding 12 months, is 2%.

The rate fell below that level in September this year.

So it looks like it has been tamed, with the help of higher interest rates.

Since then, two sets of monthly figures from the Office for National Statistics (ONS), covering the whole UK, have shown inflation going up to 2.3% and then 2.6% in the year to November.

So it’s much closer to target, but there are underlying pressures which mean it doesn’t look tame yet.

Unless you are very fortunate, your pay can never rise fast enough.

But for the economy, too much pay inflation can feed through to price inflation.

Average weekly pay across Britain has been rising at more than 5% – well ahead of price inflation.

HMRC, the tax collection agency, said its data show employees (not including the self-employed) have seen earnings go up by 7.6% in Scotland in only a year.

Some of that is to catch up with the loss of real spending power while prices were rising fast.

Some of it may be due to improved productivity, meaning you earn more because you produce more or add more value by what you do in a day’s or a week’s work.

But the British and Scottish economies have had poor productivity growth, and in the public sector, it’s gone backwards.

Looking to next year, the pay bill will go up again, including a higher minimum wage and employers’ National Insurance Contributions (NICs).

Some of that will be passed on to customers in higher prices, while it is also expected to dampen pay increases and to reduce profits.

The increased cost of employing people, through higher NICs, has weakened the labour market.

The number of vacancies being advertised, which was very high after the pandemic, has fallen.

The UK unemployment rate has gone up, though not by much.

However, the problem here is that the numbers have become unreliable, and more so for the nations and regions.

The sample of people in the Labour Force Survey is well below the level at which clear conclusions can be drawn below the UK level.

One big driver of government policy is the concern about large numbers of people who are unemployed due to long-term illness, including many who want to return to work.

But the data to support that is not clear.

The ONS is trying to correct that with different sampling techniques, but change is coming slowly.

Two cuts during 2024 have brought them from a 16-year high point at 5.25% to 4.75%.

The monetary policy committee of the Bank of England, made up of nine economists, has the task of bringing inflation to its 2% target.

But it has to be careful about choking off investment, consumer spending and economic activity, and causing a recession.

It has been concerned with the stubbornly high rate of core inflation, stripping out the volatile elements.

The committee is also wary of service sector price inflation, which is an indicator of continuing home-grown price pressures more than imported price increases due to international factors.

That helps explain why it voted last week to hold its base interest rate at 4.75%.

The Bank of England’s governor, Andrew Bailey, said that further cuts were likely, but did not encourage people to think they would come quickly.

Economists in central banks are also nervous about the impact of Donald Trump returning to the White House and imposing tariffs on goods being imported into the USA.

That would probably fuel American inflation, and could have a contagious effect elsewhere.

As a result of expectations of interest rates staying higher a bit longer, the cost of fixed term borrowing, often used for mortgages, has gone up.

The most recent estimate for the Scottish economy showed a contraction by 0.2% in output from the economy during October.

During August to October, it is estimated that the Scottish economy did not grow at all.

The equivalent UK figure for October was a 0.1% contraction.

That may have been influenced by the downbeat messaging about public spending and taxation from Downing Street and expectation of Rachel Reeves’ Budget statement on 30 October.

Once announced, the Budget hit business harder than expected, with survey evidence that it put downward pressure on investment and recruitment.

The Bank of England has a network of ‘agents’ around the UK, who provide its headquarters with intelligence on what’s happening with business around the country.

That research was summarised last week: “Across a range of sectors, firms report that the increase in NICs will have a substantial impact on their total labour costs.

“This was largely unanticipated, particularly the threshold change, which will have a particularly significant impact on those employing relatively high proportions of part-time or low-paid workers.

“Firms are working out how best to deal with this.

“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 it matter if the economy isn’t growing? Yes, the economy depends on growth’s momentum to keep generating jobs and to earn enough to be able to import the goods and services we want.

Before that, it matters because growing output means more activity, more jobs, higher total income, and thus more tax.

Both Scottish and UK governments badly need more tax revenue to meet their aspirations for public services and welfare.

Sometimes overlooked but an important part of the economy, the cost of housing has been rising faster than consumer costs.

In the 12 months to October, the cost of buying the average home in Scotland rose by £10,000, according to the official Registers of Scotland.

That was a rise of 5.5%, and faster house price inflation than any region of England or Wales.

The average price is just below £200,000, while the average UK price is nearly £100,000 more.

With a different system of house purchase in Scotland, there are different price pressures in the market.

Expectations of falling mortgage interest rates have helped prices rise during 2024.

There is also a housing emergency, according to the Scottish parliament and several councils, and that is linked to the number of new homes being built.

The Scottish government’s contribution to that during the current financial year was cut sharply.

The cost of a new private tenancy in Scotland was also up at a faster rate than consumer price inflation – rising 6.5% in the 12 months to November.

That was an increase of £59 on average monthly rent, getting close to £1000 per month.

That is a slower pace of rent increase than seen in other parts of the UK, and down from rises in the summer of 2023.

Homes, as well as heating them – also on the rise with the new year – remain one of the big costs for Scots.