The latest EY ITEM Club Scotland forecast projects a GVA growth of 0.9%. While GDP data suggests a favourable outlook with growth in Scotland outperforming the UK in 2024, it masks the quarterly profile of growth which shows a slowdown throughout 2024, with GDP growth of 0% in Q4.

This downturn coincided with rising inflation, which surged from 1.7% in September to 2.5% by December, and then 3% in January.

The final quarter of 2024 impacts the growth prospects for 2025 as it takes time to unwind, but the EY ITEM Club Scotland report does forecast growth to return at a GVA of 0.9% in 2025. However, the report suggests growth expectations are weaker than previously anticipated, with an expected GVA growth of just 0.9%, 1.5% in 2026 and 1.3% in 2027. Forecasts indicate that private services sectors and construction will drive robust GVA growth and maintain above-average growth in the following years.

Scotland’s labour market

With the softer economic outlook for 2025, the path for employment growth is less certain. While pay growth may continue to ease, the upcoming increases to employers’ National Insurance Contributions (NIC) is now front of mind.

Even before the last UK Budget, ONS figures found Scottish businesses reported they would most likely raise prices (41%) or absorb within profit margins (35%) any future increases in employment costs, and only 16% said they would reduce headcount. Exactly how firms will respond is uncertain.

A critical concern is the continued weakening labour market in Scotland. Data indicated a modest decline in employment within the private sector in January. Despite ongoing job postings, employers are struggling to fill roles, leading to a gradual rise in joblessness.

The forecast for employment growth has reduced to just 0.3% for 2025, however, a weaker employment performance cannot be ruled out, nor can a larger rise in unemployment if firms opt to reduce headcount sharply in response. Across these sectors, we expect no growth in wholesale and retail jobs this year, a small decline in arts, entertainment and recreation, and relatively muted growth in accommodation and food. However, the downside risk to the outlook for these sectors is greater, as they also typically have relatively higher concentrations of lower-paid staff. This means they are more vulnerable to the higher NICs given changes involve reducing the threshold at which firms start paying tax combined with the 6.7% increase in April in the National Living Wage.

EY Scotland managing partner, Ally Scott, said: “Scotland continues to grapple with low productivity and high labour market inactivity.

“Despite outperforming the UK last year, which is very welcome news, the pronounced slowdown at the end of last year has led to another downward revision of our growth forecast.

“The shared challenge to both public and private sectors is the pressing need to address productivity, labour market and growth trends, and try to turn this into an economic opportunity.”

Mr Scott continued: “Consumer and business confidence has also taken a hit, reflecting concerns with the economic outlook and looming tax changes. Scotland’s proportionally higher population of private, owner-managed businesses means these challenges will be of acute concern – and that’s before inheritance tax and associated succession planning is taken into account.

“Before the last UK Budget, ONS figures found 41% of Scottish businesses said they would most likely raise prices to meet any future increases in employment costs, and the reality of higher employer NICs is playing out in real time.

“Many are watching with interest to see if the mood music around energy policy shifts in the US along with the recent Rosebank court ruling will trigger an uptick in confidence in Scotland’s energy sector. With the global sentiment dial shifting even slightly, we could see financing begin to flow somewhat easier into the sector to help solve some of the biggest challenges in our energy transition.”

Sue Dawe

EY Scotland managing partner for financial service, Sue Dawe, said: “Addressing skills shortages and enhancing workforce participation will be essential in revitalising Scotland’s labour market.

“While household incomes are expected to recover, inflationary pressures and cautious business sentiment may dampen investment and, therefore, hiring.

“Growth in mortgage lending is forecast to more than double this year as falling interest rates boost housing market activity. This will undoubtedly be welcome news to the construction sector but Scotland’s infrastructure requires sustained investment and support to maintain momentum.

“The report underscores the pressing need for strategic interventions across the public and private sectors to address Scotland’s low productivity levels and high labour market inactivity.”

Consumer and business confidence have also taken a hit, with the Composite Consumer Sentiment Indicator dropping to its lowest level since early 2024.

One of the significant risks yet to register over Scotland’s economic forecast is the potential impact of US tariffs. Scotland’s largest export, whisky, could be vulnerable to targeted tariffs given the US is its largest market.

The report outlines a mixed economic landscape for Scotland, with the services and construction sectors driving growth. Consumer-facing services, particularly accommodation, food services, and arts and entertainment, have benefitted from increased consumer spending. However, the production sectors, including manufacturing, mining, and utilities, have struggled significantly, with a steep decline in output reported in the latter part of 2024.