EY Club revises down growth hopes for ‘unbalanced’ Scottish economy

The EY Scottish Item Club also warned that it expected growth in 2016 to be even lower at 1.8 per cent.

The Club said that a “better balance” needed to be struck in the Scottish economy after predicting that while construction output is forecast to soar by 14.6 per cent this year, growth of only 1.3 per cent is anticipated in services.

Growth will lag well behind the UK both this year and next, where the club predicted growth rates of 2.5 per cent and 2.4 per cent, respectively.

In a report, the item club warned that imbalances north of the border could lead to “vulnerability for future growth, unless the performance of private services picks up”.

According to analysts at EY, the north east, affected by the plunging oil price is set to suffer the most despite demonstrating overall growth in the face of the oil price crash until recently.

Employment is still expected to have risen 1.7 per cent this year, second highest in the UK after London.

However, steadily rising unemployment since June and the full impact of the downturn in oil and gas means the employment growth rate for Aberdeen is predicted to slump to just 0.1 per cent over the next three years with knock-on effects to the wider economy, EY’s Scottish Item Club said.

During the same period up to 2018, EY expects the utilities, extraction and agriculture sector to also experience a 3.8 per cent drop in annual employment.

The report said sectors suffering falls in output included financial services, extraction, metals and public administration.

On a positive note, water, electricity and gas and chemicals are all expected to enjoy growth rates of more than 5 per cent this year, while a pick-up is expected in the retail and wholesale sectors.

Next year, “modest” employment gains are anticipated for Scotland overall, with an additional 8,000 jobs.

Dougie Adams, senior economic advisor to the club, said: “Although Scotland has been impacted by the effects of lower oil prices on North Sea-related activity, weak growth in private services is a major cause of this year’s shortfall in comparison to UK growth.

“The private services sectors expected growth of 1.3 per cent in Scotland is well below trend and compares with growth of well over 3 per cent in the UK.

“And, as in the UK, stalling world trade growth held back manufacturing.”

The club anticipates construction output to rise sharply this year as a result of major projects such as the Forth Crossing and the M8, M73, M74 enhancements.

However, the report warned that the growth in the sector may not be sustainable.

Mr Adams said: “Construction represents around 6 per cent of the Scottish economy yet accounts for 40 per cent of GDP growth over the last two years.

“It is an impressive performance but one that may not be sustainable. What happens when the major projects come to an end, and will these improvements to Scotland’s infrastructure drive up productivity in the longer-term?

“Scotland’s economy has been buoyed by the construction industry but this has created an overdependence of growth on this one sector.

“Scotland needs more balanced growth across the sectors in order to secure sustainable growth.”

He added: “With construction output expected to pull back to just 3 per cent in 2016, this means the forecast of continuing GDP growth requires a return to form in key areas such as professional and administrative services where growth is forecast to return to trend of about 4 per cent in 2016.”