Mark Harvey
Mark Harvey

Scotland’s economic growth increases but still outpaced by the UK

Scotland’s economic growth is set to increase by 1.3% this year, but this will be a slower pace than previously predicted and behind the UK’s growth rate as a whole, according to the EY Scottish ITEM Club 2018 Summer Update published today.

The EY Scottish ITEM Club has downgraded its forecast from the 1.4% that it predicted in December 2017, when Scotland’s growth was expected to match the performance of the UK as a whole. In contrast, the UK is now forecast to grow by a slightly higher than expected 1.6% this year.

Scotland’s growth this year is due to be driven by the continued positive contribution of consumer spending, albeit at a slower pace as the savings ratio dwindles. The rate of consumers’ expenditure is due to fall from 1.1% in 2017 to 0.5% in 2018. The strength of exports in 2017 resulted in net trade delivering the biggest boost to the Scottish economy last year, and this is expected to be repeated in 2018. However, a strengthening pound, which will make products more expensive to international buyers, will temper some of the positive impact this year.

Mark Gregory, EY’s UK Chief Economist, said: “Economic growth in Scotland is moving beyond the 0.8% growth rate we saw in 2017. While this demonstrates that Scotland is set to successfully pull out of an economic tailspin and return to growth of above 1%, there are also signs that UK-wide economic growth will remain firmly ahead of Scotland’s in the near term.”

Mark Harvey, EY Senior Partner for Scotland, said: “In the last year exports and foreign direct investment have been particular success stories for Scotland and offer evidence of the opportunities available from a more internationalised Scottish economy. While global trade and Brexit present uncertainties, these should not act as roadblocks to improving Scotland’s position on the world stage.”

Employment growth in Scotland is forecast to slow to 0.7% in 2018, and to 0.2% by 2021. Despite this slowdown, employment is forecast to rise by 39,000 net new jobs from 2017 to 2021. Private services are predicted to drive the majority of employment growth through to 2021, with construction also contributing to job creation as the sector recovers from eight consecutive quarters of contraction.

In-line with UK trends, sectors that are reliant on consumer spending and tourism, such as ‘accommodation and food services’, ‘wholesale and retail’, and ‘arts, entertainment and recreation’ are also expected to grow in employment terms while Scotland’s retail sector is expected to experience modest job losses in 2018.

Mark Harvey, said: “The challenge of sourcing employees is a recurring one for Scottish businesses, whether its agricultural labourers, drivers for the transport and logistics sector or the talent pipeline for highly qualified individuals. This is likely to be intensified by the expectation, as outlined in this report, that annual working-age net migration will more than half by 2021, compounded by the UK-wide trend of an ageing population. This will make strategic workforce planning increasingly important for business leaders.”

The EY Scottish ITEM Club Summer Update states that Brexit remains the main risk to Scottish economic growth. There are still a number of key issues that need to be agreed between the UK and the EU and, while uncertainty persists, business investment is likely to be lower than might otherwise have been the case.

Mark Gregory, said: “Whatever the long-term impact of Brexit, it is clear that the Scottish and UK economies are growing below historic trend rates. The fall in sterling stimulated inflationary pressures and business confidence has been impacted by the increased uncertainty over future trade, regulation and migration policies. Although a strong global economy has boosted trade, the overall story is one of below trend growth.

“Businesses need, as a first priority, to ensure their plans are robust to any potential short-term shocks. However, this should not be at the expense of continuing efforts to assess long-term opportunities and to position for these.”

Productivity in Scotland remains lacklustre. Productivity growth averaged at 1.4% per year during the decade to 2006, while in the following decade to 2017 productivity growth averaged just 0.4% per annum.

Mark Harvey added: “Scotland’s disappointing productivity record makes for an uneasy read but action can be taken to stall, if not reverse the decline. The adoption of new and emerging technologies in the manufacturing sector is driving up productivity. Some areas of financial services, and insurance in particular are making significant efficiency improvements by using Robotic Process Automation (RPA) to automate standardised processes with the potential to reduce costs by between 25% to 40%[1] in some cases.

“New technologies can help deliver new efficiencies and greater productivity. It can also connect the best of Scotland to the rest of the world and introduce major players to new markets where they have new opportunities to succeed.

“Business must also continue to engage with government to explain the challenges facing them both now and in the future, whether related to inflation, access to labour or investment, in order to help find solutions to mitigate against the negative impacts. Scotland must ensure it remains competitive and attractive to live, work and do business here.”

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