Scotland’s economy grew just 0.1% in Q1 2026 as services and construction offset a sharp fall in production, leaving ministers defending their growth strategy in a Holyrood debate on “Growing Scotland’s Economy”.
Scotland’s onshore GDP rose by 0.1% in the first quarter of 2026, down from 0.2% in the final quarter of 2025 and well below the UK’s 0.6% growth over the same period. Over the year to Q1 2026, Scottish GDP is up 0.8%, compared with 1.1% across the UK, underscoring a persistent growth gap.
As the Office of the Chief Economic Adviser puts it, “the Scottish economy grew 0.1% in the first quarter of 2026, slowing from 0.2% growth in the fourth quarter of 2025”. The bulletin adds that “the subdued pace of growth is reflective of business survey evidence in which businesses have reported that new orders and demand conditions remained weak over the first quarter of the year and have weakened further over March and April”.
The latest bulletin links that subdued pace to weak demand and new orders, with business surveys pointing to conditions softening further through March and April as the Middle East conflict pushed up energy and fuel costs. Consumer sentiment has fallen to its lowest level since early 2023, adding another drag on spending and investment appetite.
Behind the headline number, the production sector contracted by 0.5% in Q1 2026, reversing from 1.3% growth at the end of 2025 and acting as a brake on the wider economy. Manufacturing output fell by 1.4% over the quarter, while production as a whole is now 2% lower than a year earlier despite gains in electricity, gas, water and waste.
By contrast, services grew by 0.2%, with consumer-facing services returning to growth and retail output up 2.2%, even as accommodation and food services continued to shrink. Construction output moved back into positive territory with 0.4% growth after a sharp drop around the turn of the year, marking its first three-month rise since September 2025.
The bulletin highlights how “impacts from the conflict in the Middle East have started to emerge in the Scottish economy”, with global wholesale oil and gas prices “significantly above their pre-conflict levels” and highly sensitive to how long supply routes remain constrained. It notes that UK headline inflation fell to 2.8% in April, helped by a 7% cut in the domestic Energy Price Cap, but warns that “stronger inflationary pressures are building” and inflation is “expected to rise to around 4%” later in 2026 as a 13% cap increase in July and higher business costs work their way through.
For high-growth firms, the combination of higher input costs and weak demand is visible in business surveys, with the RBS Growth Tracker reporting contracting activity in April and a sharp rise in reported input prices. The Scottish Consumer Sentiment Indicator has dropped to a net balance of -16.7, reflecting weaker views on current economic performance, household finances and willingness to spend.
Scotland’s labour market remains relatively tight by historical standards, but the bulletin notes it has weakened over the past year. The unemployment rate rose to 4.4% in the three months to March, while the employment rate fell to 73.7% and the inactivity rate climbed to 22.7%, pointing to softer labour demand.
PAYE data show the number of payrolled employees has slipped 0.6% over the year to April to its lowest level since early 2023, even as real earnings growth picked up to 2.7% in April on the back of 5.6% nominal wage growth and lower inflation. For growth businesses, that mix of easing but still-tight labour markets, rising real wages and elevated uncertainty complicates hiring and investment decisions.
The bulletin’s outlook section stresses that “the conflict in the Middle East continues to weigh on the economic outlook, generating upward pressure on energy prices and uncertainty”. The Scottish Fiscal Commission’s January projections still point to Scottish GDP growth of 1.3% in both 2026 and 2027, but the bulletin explicitly flags the conflict as a downside risk.
In April, the Fraser of Allander Institute cut its forecast for 2026 from 1.1% to 0.9%, and from 1.2% to 1.0% in 2027, citing the impact of higher energy prices and weaker global conditions. KPMG’s latest analysis, reported through Scottish business channels, now expects Scottish GDP growth to slow to around 0.8% in 2026 from an estimated 1.4% in 2025, broadly aligning with those more cautious independent assessments.
Ministers brought a dedicated “Growing Scotland’s Economy” debate to the Scottish Parliament on 9 June, days after the economic bulletin set out the new numbers and risks. For operators and investors, the key question is whether that debate translates into more targeted support for the production-intensive parts of the economy now acting as a drag on GDP.
For high-growth manufacturing and production businesses, a 0.5% quarterly fall in production output and a 2% year-on-year decline signal a tougher operating environment even as services and construction hold up. At the same time, the combination of modest headline growth, downgraded independent forecasts and a still-busy policy agenda at Holyrood means macro conditions will remain central to how investors evaluate Scottish pipelines in 2026.
