Scotland is striving for growth amidst new economic headwinds

Scotland’s economy has faced stark challenges in recent years. Exiting the European single market, the pandemic, and the energy crisis sparked by Russia’s invasion of Ukraine have placed a strain on Scottish businesses and, as a result, economic growth has been slow.  

Although annual GDP in 2021 increased by 8.9 per cent, it followed a 12 per cent contraction in 2020 due to the effects of the pandemic. In 2022, recovery was slower at five per cent, and the Scottish Government noted that, adjusting for real terms inflation, GDP was still 0.3 per cent below pre-pandemic levels.  

Since then, there have been modest increases of 0.5 and 1.1 per cent in 2023 and 2024, and while Scottish ministers have been upbeat about the relative resilience shown throughout this tumultuous period, this year’s programme for government is clear that “Scotland is not immune” to continued economic uncertainties.  

In April, new headwinds from across the Atlantic in the form of global tariffs imposed by the US Government sparked fresh fears for the Scottish economy. President Donald Trump called it ‘Liberation Day’, claiming it was as a move to balance “chronic trade deficits” which he has described as a “national emergency that threatens our security and our very way of life”. 

The UK was dealt a 10 per cent tariff on most of its goods imported to the US – relatively low compared to the 20 per cent imposed on the EU, which Trump threatened to rise to 50 per cent last month. However, it has still caused great levels of uncertainty for the Scottish industries reliant on the export market.  

First Minister John Swinney said there was “no way of sugar-coating” the situation. “The announcement by President Trump on tariffs is deeply damaging. Anyone who thinks we’ve got some relief because it’s only 10 per cent is, I’m afraid, not facing the reality of what is a very significant economic obstacle that’s been put in the way of some of Scotland’s key industries,” he said.

However, last week, the Manhattan-based Court of International Trade blocked Trump’s decision to set global tariffs, ruling that he had “exceeded any authority” of the economic emergency powers used to justify not legislating through congress. The White House was given 10 days to halt the tariffs and refunds to businesses will be made if the ruling is upheld. 

But uncertainty remains. Within minutes of the decision, Trump’s administration filed an appeal which could yet see the case reach the Supreme Court, where there is a conservative majority. Despite that, it is unclear how it may rule having ruled against Trump many times before.

If the tariffs remain, they are expected to negatively impact growth in Scotland. Projections for 2025 had suggested that growth was expected to be higher than the previous year. Consultancy firm EY has revised Scotland’s Gross Value Added growth forecast for 2025 from 1.3 per cent to 0.9 per cent, attributing the slowdown to concerns over US tariffs on key exports. And with 12.3 per cent of the nation’s goods exports destined for the US last year, it underlines the significance of that market to Scotland.  

Many of Scotland’s biggest export industries have voiced revenue concerns over the potential slowdown in the US markets. 

The salmon industry exported £225m-worth of produce to the US last year. While Salmon Scotland said the “direct impact on consumer demand in the US is expected to be minimal”, it warned of the potential for wider disruption to the European market as other salmon-producing nations assess their options.  

The whisky industry, which saw £971m of its £5bn-plus annual contribution to the Scottish economy come from the US market, is also concerned. Reacting to the tariffs in April, the Scotch Whisky Association said it was “disappointed” and called for “intensive efforts by the UK Government to reach a deal with the US administration”.  

Reflecting on the impact of the 25 per cent US tariffs on single malt whisky between 2019 and 2021, William Wemyss, owner of Kingsbarns Distillery in Fife, says the “value of the Scotch exports came down pretty substantially”. Figures show it caused exports of single malts to the US to fall by 32 per cent in the first 12 months, while some small and medium-sized distilleries reported exports falling by over 50 per cent. 

The fresh concern for the industry, despite the tariff being set at a much lower rate, is “it doesn’t matter whether it is blended or single malt, this round of tariffs affects every bottle of Scotch that goes into the US”. 

In the weeks following Trump’s decision, the UK struck two trade agreements with the US and India, as well as a ‘reset’ agreement with the EU. The deal with India will see it slash tariffs on 90 per cent of UK exports, with 85 per cent becoming tariff-free within ten years.

Importantly, for the whisky and gin sector, the 150 per cent tariff will be halved to 75 per cent, eventually falling to 40 per cent within a decade. 

Wemyss is particularly optimistic about this deal, describing the Indian market as the “final frontier for the whisky industry”.  

“The current tariff has put a lot of single malts out of reach for the Indian consumer, and while 75 per cent is still high it gives small independents like us the chance to establish ourselves in the market. And particularly with the further drop over the next 10 years, it makes it a great opportunity for the industry generally.” 

Ultimately, it is still too early to say what the impact of tariffs will be on growth in the long term if Trump is successful in the US appeals process. Dr Joao Sousa, deputy director of the Fraser of Allander Institute, says the resultant volatility in markets, which has seen steep falls and rallies in recent months, is “an indication that agents don’t know what to expect”.  

“We’ve not yet seen the full extent of these tariffs, mostly because large parts were paused for 90 days,” he tells Holyrood.  

In the last 18 months, the Scottish Government has significantly increased its investment in the renewables sector, with the dual aim of driving economic growth and achieving its legally binding net zero targets. Last year, it allocated £66.9m as part of a five-year, £500m investment for the offshore wind supply chain, which the government hopes will attract up to £1.5bn in private sector investment.  

Upgrades to key infrastructure for offshore wind are already underway, with the Port of Nigg expansion set to include a new ultra-deep-water quay, with the hope of positioning the port as a central hub for fixed-bottom and floating offshore wind projects. The brownfield port at Ardersier, which is part of the Inverness and Cromarty Firth green freeport, is being redeveloped into a circular energy transition facility. Economy Secretary Kate Forbes told Holyrood that it will be “the largest of its kind in Europe” and is “one of the most exciting projects” underway in Scotland. 

Both projects are poised to support industrial scale deployment of offshore wind turbines and create hundreds of jobs for the local economy, which is crucial to mitigating against projections by the Highland Council suggesting that the overall population could decline by 5.3 per cent by 2040, with more severe reductions in specific areas.  
Sousa is optimistic about the investments into the renewable energy sector, pointing to increased energy security and lowered emissions. However, he says the economic impact of the investment will be felt “much more long-term”. 

“There was a lot of chat 12 months ago over whether these opportunities would materialise quickly, but ultimately, both in Scotland and the UK, the movement will be slower than was first thought,” he says. 

The increase in employers’ National Insurance contributions is a real cause for concern for businesses and growth too. According to the Fraser of Allander Institute’s Scottish Business Monitor report for the first quarter of this year, the two main themes were rising costs and a reduction in hiring, due to the change announced in Chancellor Rachel Reeves’ budget in October. Ninety per cent of businesses say they anticipate higher costs, while around half have scaled back hiring plans as a result.  

This is concerning for Forbes, who says it has created “a lot of uncertainty for business” and will be the “biggest limitation to growth”.

Sousa echoes these comments, explaining that business confidence is “not at a high point” and 80 per cent of those who responded in the recent survey expect economic growth to remain weak or very weak. 
“It’s quite reasonable to want to raise taxes, but that comes with costs, and in this case, it has come at a cost to businesses,” he says. “And it certainly seems like it has had an impact in terms of the business outlook. 

“And one of the other issues we have in Scotland, compared with our international peers, is low capital investment, so there is a question as to whether the capital will be there for businesses to invest over the next few years, which will have an impact in the long run. If there is not enough then the country’s productivity is likely not to grow as fast as it could. It is a vicious circle that we are stuck in.”