At the same time, the Institute warns that ongoing problems with the reliability of labour market statistics are obscuring the true picture of employment and economic inactivity, posing a challenge for policymakers.

The Institute’s latest Economic Commentary comes ahead of the publication tomorrow of its Scottish Business Monitor, which finds that last quarter’s tentative recovery in business activity has stalled – with four out of five firms expecting weak to very weak economic growth over the next 12 months.

Notwithstanding this, the Institute has uprated its 2025 forecast from 0.8% to 1.0%, but highlights the change comes on the back of last year’s poor growth.

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.”

The commentary also highlights growing concern about the quality of official labour market statistics, which have faced significant disruption in recent years.

The Office for National Statistics (ONS) 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.

Analysis by Strathclyde researchers at the Scottish Health Equity Research Unit (SHERU) suggests that official data may be misrepresenting recent trends in employment and inactivity.

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.”

The final key finding of the commentary is that Scottish Government spending on child-related benefits has risen sharply, offsetting UK government reductions in support for families.

While UK spending on child benefits in Scotland has fallen from £2.7 billion to £2.2bn since 2019-20, this has been balanced by increased devolved spending, bringing total support for children back to around £2.7bn.

The Scottish Child Payment, worth £27.15 per child per week, now supports around 325,000 children and accounted for £500 million in spending in 2024-25.