KPMG forecasts Scotland’s GDP will grow by 1.2% in 2026, slightly ahead of the 1.1% growth rate forecasted for the UK. The firm’s report predicts Scottish businesses are set to benefit from new agreements with key trading partners, particularly Scotch whisky, with the UK-India trade deal halving tariffs in their largest export market by volume.

A temporary rise in UK headline inflation is set to ease by mid-2025, with inflation expected to return to the 2% target by the middle of 2026. Lower inflation will likely give the Bank of England space to push through a series of rate cuts through 2025 and 2026, potentially reducing the base rate to 3.25% by the end of 2026, which has the potential to stimulate consumer spending growth.

Summary of KPMG’s GDP % forecasts for the Scottish and UK economy

While KPMG is forecasting a brighter economic outlook, the firm also identified several challenges holding back Scottish growth in 2025.

Scottish GDP grew by just 0.4% in Q1 2025, behind the UK average of 0.7%, as rising input costs, including higher employer National Insurance contributions, continue to squeeze margins, delay hiring, and sustain inflationary pressure. Consumer confidence has also weakened, with April’s Scottish Consumer Sentiment Indicator (SCSI) falling to its lowest level since mid-2023.

Scotland’s fiscal outlook is also tightening as increases in UK spending could result in smaller percentage uplifts for Scotland, due to its higher per capita funding baseline. This could lead to tighter spending settlements as well as restricting the Scottish Government’s ability to respond to future pressures.

Yael Selfin, chief economist KPMG in the UK, commented: “While current pressures on businesses are significant, Scotland’s economy is well placed to strengthen in the months ahead, and if conditions improve as we expect, could give it a modest edge over the UK as a whole in 2026.”

“With inflation expected to fall back to target and interest rates likely to ease, Scottish firms stand to benefit from a more stable economic climate. Many of its key sectors, including food and drink and manufacturing, are also acutely affected by international trade tensions – so any new agreements with key export partners could give Scottish businesses more reason for optimism.”