Brexit continues to cast shadow but employment in Scotland is predicted to rise

Ally Scott

The report says Scotland’s economy is expected to achieve non-oil GDP growth of only 1.0 per cent this year compared to 1.3 per cent in 2018 and 1.4 per cent in 2017, before recovering slowly to 1.3 per cent in 2020.

The EY Scottish ITEM Club report says that Scotland’s growth will be impacted by weaker consumer confidence levels and business sentiment, driven largely by Brexit uncertainty and slower levels of global growth. Global GDP growth is forecast at 2.7 per cent this year compared to 3.2 per cent in 2017.

According to the report, the ‘mini boom’ in Scottish manufacturing last year is also unlikely to persist in 2019.

The EY Scottish ITEM Club is forecasting no growth in factory output this year, except in the food, beverages and tobacco sector. Evidence from the Markit Purchasing Managers’ Index (PMI) survey suggests that manufacturing in Scotland will see little growth in 2019, compared to 3.2 per cent in 2018. 

The unemployment rate in Scotland is projected to fall from 3.9 per cent in 2018 to 3.7 per cent in 2022, while Scottish employment is projected to increase 2.0 per cent by 2022.

Nearly half of the projected 53,000 net increase in Scottish employment over 2019-22 is accounted for by three sectors: professional, scientific & technical services; administrative & support services; and, information and communications. These three sectors are also expected to be key drivers of Scotland’s growth this year.

However, the report says that the working age population in Scotland is expected to decline. Net inward migration, while already declining, will be much lower than in recent years and is a key driver of this trend. Scottish companies could therefore face growing issues over skill shortages although the report says this may increase the speed of adoption of new technologies such as robotics and AI. Having peaked at 31,000 in 2016, net migration of working age people in Scotland was 23,000 in 2018 and is forecast to be below 8,000 by 2022.

A tighter labour market is expected to ‘gradually nudge up’ earnings growth in Scotland, from the 1.2 per cent increase last year to 3.3 per cent in 2021 and 2022. However, consumer spending is expected to be subdued.

Last year, in contrast with the UK, spending growth in Scotland relied on the continued trend of households increasing borrowing or reducing saving. However, the report says that a reliance on consumer spending at the expense of a reduced saving ratio will be difficult to sustain.

Consumer spending growth is expected to slow to 0.8 per cent this year from 1.1 per cent in 2018, before picking up to 1.5 per cent in 2020 and 2021.

The EY Scottish ITEM Club report says the main risks to its forecast originate beyond Scotland – particularly in the short-term. The most significant downside risk continues to be a ‘no-deal’ Brexit which, because of the delays that have already taken place, is expected to impact economic growth in the second half of 2019 and beyond.

EY Scotland’s managing partner Ally Scott said: “Scottish consumer confidence and business sentiment are expected to weaken this year, with the global economy and Brexit uncertainty major causes. Even if a Brexit deal is agreed in the coming months, difficult trade negotiations are likely to follow. This, combined with other global worries, means that Scottish companies are likely to remain very cautious in their investment and employment decisions.
“Our latest Attractiveness Survey showed that while Foreign Direct Investment (FDI) decreased in Scotland last year, it remains a compelling destination of choice for investors – second only to London.

“As digital continues to embed in the Scottish economy, three related sectors of professional, scientific & technical services, administrative and support services, and information & communications are likely to be key growth drivers – both in terms of growth and employment. Employment growth for these three sectors is expected to be second only to health & social work and more than five times larger than the finance and insurance sector.”

The EY Scottish ITEM Club report is available here.