You might think that an upgrade to Scotland’s growth forecast for this year – unveiled today by a leading research institute – might be accompanied by an upbeat narrative.

However, it is not.

The University of Strathclyde’s Fraser of Allander Institute, even while raising its growth forecast for the Scottish economy this year from the 0.8% it predicted in June to 1%, highlights pessimism among businesses about the outlook.

It also flags difficulties for policymaking created by issues with official labour market statistics. And Fraser of Allander appears at pains to ensure people are not tempted to get carried away on a wave of optimism on the back of the upgrade to its growth forecast for Scotland for this year.

In its latest quarterly economic commentary, published today, the research institute says: “While our 2025 forecast has been uprated from 0.8% to 1.0%, this is nothing to write home about. Weak growth at the beginning of 2024 means our economic outlook is comparatively better than the previous year, but we have seen contractions in several areas.”

In particular, Fraser of Allander flags contractions in Scottish manufacturing.

The research institute says: “The FAI forecast for 2025 has been revised upwards since the previous quarter to reflect stronger growth in the year to date compared to the relatively poor economic performance in early 2024. Our views on the medium term have remained the same, with relatively modest growth expected in 2026 and 2027.”

Its 1% growth forecast for Scotland for this year now matches the projection of expansion in the UK as a whole this year from the Office for Budget Responsibility (OBR).

Fraser of Allander continues to project growth of 1% in Scotland next year and expansion of 1.1% in 2027.

It notes the Scottish Fiscal Commission is projecting economic growth north of the Border of 1.1% this year, 1.8% in 2026, and 1.7% in 2027.

The OBR is forecasting respective UK growth of 1.9% and 1.8% in 2026 and 2027.

Fraser of Allander also declares that its latest quarterly commentary “arrives amidst continued challenging economic circumstances”.

It also reveals that its imminent Scottish business monitor due to be published tomorrow has found that activity “remains mixed with last quarter’s tentative recovery having stalled”, and that the “economic outlook has worsened”.

Read more

Offering a “sneak peek” of this monitor, Fraser of Allander reveals the survey shows that four out of five businesses “now expect weak or very weak growth in the Scottish economy over the next 12 months”.

Fraser of Allander says: “Scottish businesses have become markedly more pessimistic about the economic outlook.”

The research institute highlights the fact that Scotland’s manufacturing sector shrank by 2.9% between the first and second quarters of 2025 – “dropping below 2019 levels for the second time since Covid-19”. And the detail of the manufacturing figures offers little positive.

Fraser of Allander notes: “All manufacturing sub-sectors saw a drop except for the computer, electrical, electronic, and optical equipment subsector which saw an increase of around 0.9%. Chemical and petroleum manufacturing saw the largest quarterly dip across manufacturing sub-sectors – falling by 13.3% this quarter.”

The Scottish Government has highlighted the impact of the cessation of oil refining at Grangemouth on the economy. Crude oil processing at Grangemouth ended on April 29, owner Petroineos confirmed at the time.

Professor Mairi Spowage, director of the Fraser of Allander Institute, said: “Scotland’s economy continues to face a fragile recovery, held back by uncertainty and data gaps that make it harder to target the right policy responses. Restoring business confidence and improving the quality of economic evidence must be central to future decision-making.”

Fraser of Allander details the issues with the labour market statistics, a crucial economic indicator.

It observes: “The Office for National Statistics suspended its Labour Force Survey between October 2023 and February 2024 because of low response rates. While data collection has since resumed, average sample sizes remain around 40% below pre-pandemic levels, and regional labour market statistics have not yet regained their official accreditation.”

Fraser of Allander points out that analysis by University of Strathclyde researchers at the Scottish Health Equity Research Unit (SHERU) “suggests that official data may be misrepresenting recent trends in employment and inactivity”.

It adds: “While ONS figures indicate that inactivity has fallen, SHERU’s modelling shows a slight increase of around 32,000 people year-on-year.”

Emma Congreve, deputy director of the Fraser of Allander Institute and co-director of SHERU, said: “Reliable data is the foundation of good policymaking, but right now Scotland’s labour market picture is blurred. The ONS has made progress but significant gaps remain – particularly at regional level where the data quality is poorest.

“We are urging policymakers to interpret headline statistics with caution and to recognise that key labour market challenges could be more persistent than current data suggests.”

In these most difficult of economic times, it is crucial to recognise limitations of data, where these exist.

All in all, there is not much positive from an economic standpoint in Fraser of Allander’s latest economic commentary.

However, from a societal perspective, there are some positive figures.

Fraser of Allander flags as the “final key finding” of its commentary a sharp rise in Scottish Government spending on child-related benefits, “offsetting UK Government reductions in support for families”.

The research institute says: “While UK spending on child benefits in Scotland has fallen from £2.7 billion to £2.2 billion since 2019/20, this has been balanced by increased devolved spending, bringing total support for children back to around £2.7 billion.”

It observes that the Scottish child payment, which is worth £27.15 per child per week and is aimed at helping low-income families, now supports around 325,000 children and accounted for £500 million in spending in 2024/25.

That is a substantial cost.

However, this support is crucial from a societal perspective.

And we should keep in mind the economic boost from such support.

This payment will be made in many cases to people who have to spend all or most of their income to live, so this money will boost aggregate demand and provide some kind of fillip to the Scottish economy in what are very difficult times in the UK as a whole.