Scotland’s economic growth forecast slashed

The EY report, published today, predicts Scottish output growth for 2016 to be 0.7 per cent and forecasts 0.4 per cent for 2017. This compares with UK GDP growth rates of 1.9 per cent and 0.8 per cent respectively. Modest growth is expected to return from 2018 but the future outlook will depend on the economic landscape as shaped by Brexit, potential policy changes brought by a Trump presidency and the implementation of extended powers to the Scottish Government over tax and revenue spend.

Consumer spending and investment drove the expansion of nominal GDP from mid-2015 but these bright spots of economic growth have faded. With the saving ratio dropping to a record low and personal disposable income to drop 0.1 per cent next year, consumer expenditure will be unable to buoy economic growth and business investment will suffer from the politically-driven uncertainties.

The recent fall in the value of the pound has led to a pick-up in manufacturing exports orders but the downside of the currency depreciation will show through in 2017 as rising import prices hit both business costs and consumers’ pockets.

Dougie Adams, senior economic advisor to the EY Scottish ITEM Club, said: “During the last 12 months Scottish growth has been challenged by various economic factors. The unsustainable growth from the construction sector has waned as expected and the impact of low oil prices continues to reverberate through the economy.

“A few sectors performed well in the first half of the year resulting in patchy growth with private services delivering the strongest performance at 2.6 per cent, just shy of the UK’s level of 3 per cent. Although manufacturing output as a whole fell by 3.6 per cent the food and drink sub-sector surged by 9 per cent.”

Scotland’s seven cities; Aberdeen, Dundee, Edinburgh, Glasgow, Inverness, Perth and Stirling, account for 45 per cent of total employment in Scotland and more than 55 per cent of business services employment.

Growth in Edinburgh and Glasgow is predicted to outpace the Scottish annual average throughout 2016 to 2019 at 1.6 per cent and 1.3 per cent respectively.

While Stirling is expected to perform on a par with Scotland at 1 per cent with Inverness just slightly below on 0.9 per cent.

Edinburgh’s strong presence in business services will be responsible for leading growth in the capital while the information and communications sector will be the fastest area of growth in the other three top performing Scottish cities.

In terms of employment Inverness, Perth and Stirling are set to perform better than the Scottish average in 2016 while Glasgow will increase by 0.1 per cent. The picture for Aberdeen continues to be impacted by the fall in oil prices with total employment expected to drop by 1.6 per cent this year though there has only be a marginal rise in unemployment since the summer.

Mark Harvey, EY Senior Partner for Scotland, said: “None of the UK’s nations, regions or cities will be immune to slower economic growth over the next three years but there will be significant variations across the country indicating there is more work to be done in rebalancing the economy. From a Scottish perspective we would of course want to see growth boosted to be more in line with the UK.

“In a slower growing economy it will be harder to achieve more economic balance, not only on a UK level but across Scotland too. Although we can see pockets of growth in Scottish cities, little progress is likely to be made to increase these further and expand the output of the weaker cities in the short-term.

“UK and Scottish policy must be designed to complement local policy through targeted initiatives to support trade, deliver infrastructure, invest in skills and support growth in key sectors.”

The economic landscape in Scotland, the UK and beyond is going through significant change and the eventual outcome will shape growth and prosperity.

In relation to Brexit, clarity around trade agreements will go some way to boost business confidence but the potential variation in tariffs for different sectors creates a high degree of uncertainty for those charged with long-term decisions.

This period of international flux comes at a pivotal time for Scotland, just as the Scottish Parliament takes on more responsibility for revenue raising.

Mr Harvey added: “The changing landscape for Scotland and the UK means that it is even more important to continue to monitor economic developments at city and Scotland levels and to include the potential implications of emerging economic, industrial and trade policy across the country.

“The Autumn Statement confirmed the thrust of policy is to reshape the economy in parallel with ensuring Brexit. Close attention will also be paid to how the Scottish Government decides to allocate the additional £800m in the capital budget announced by the Chancellor. For a first indication we will look to the Scottish Government Draft Scottish Budget 2017/18 later this month.

“Judgements on the growth potential of the Scottish economy and the implications for devolved and assigned tax revenues are critical to decisions on the Scottish Government’s economic policy and on the scope to fund transformative public sector investment and interventions.

“The design of the industrial strategy, the impact of moves to create fairer economic outcomes, including the approach to public expenditure and taxation, will be the key drivers of future economic performance at city level and Scotland-wide.”