Scotland’s economy is forecast to grow by 1.3% in 2026 according to projections from the Scottish Fiscal Commission, with lower inflation and easing monetary policy supporting steady expansion.
The February economic bulletin from the Scottish Government confirms that economic growth remained broadly stable through the final months of 2025, with output rising 0.3% in the three months to November. I have analysed the detailed figures, and while the growth rate is modest, it represents a return to more normal economic conditions after several turbulent years.
Sectoral Performance
The services sector drove the recent growth, offsetting declines in construction activity. Scotland’s economy is heavily weighted towards services, meaning strong performance in this sector is crucial to overall economic health. Production also showed positive movement, though manufacturing remains below its pre-pandemic peak.
The construction sector’s contraction reflects ongoing challenges including labour shortages, supply chain disruptions, and higher costs for materials. Several major infrastructure projects have experienced delays, contributing to reduced output in this part of the economy.
Employment and Inflation
Unemployment remained relatively low at 3.7%, suggesting the labour market continues to be tight by historical standards. However, the number of payrolled employees fell by 8,700 over the year to December, indicating some softening in employment conditions.
Inflation rose to 3.4% in December, up from 3.2% in November, though forecasters expect the rate to fall back to around 2% by April. Lower inflation should ease pressure on household budgets and potentially allow interest rates to decrease further, supporting consumer spending and business investment.
Business Confidence
Business surveys for early 2026 indicate that demand conditions remain subdued, though there are signs of improved stability compared to the final quarter of 2025. Companies continue to face challenges including energy costs, wage pressures, and uncertainty about economic policy.
The Fraser of Allander Institute’s forecast of 1.1% growth in 2026, rising to 1.2% in 2027, closely aligns with the Scottish Fiscal Commission’s projection. This consensus among economic forecasters suggests relatively high confidence in the predicted trajectory.
Policy Implications
The modest growth forecast shapes the context for the upcoming Scottish Parliament election, with economic management likely to feature prominently in party manifestos. Opposition parties will argue that stronger growth is achievable with different policies, while the SNP will defend its economic record.
Whatever the election outcome, Scotland faces ongoing challenges in productivity growth, population demographics, and transitioning to a net-zero economy. The 1.3% growth forecast provides a baseline against which future economic performance can be measured.