Scotland facing negative job growth in 2017 – PwC

The findings also show that Scotland should manage to avoid recession while the rest of the UK looks set to see positive employment growth.

However, the UK also faces issues as there is a chance of a public borrowing overshoot of over £100 billion over the five years to 2020/21 compared to the Office for Budget Responsibility (OBR) forecast prior to the Brexit vote.

The global accountancy firm report states UK economic growth held up better than expected in the months following the Brexit vote, particularly regarding consumer spending and services. For 2016 as a whole, UK GDP growth now looks likely to be around 2 per cent, which could still be the highest in the G7 according to PwC.

PwC projects that UK growth will slow to around 1.2 per cent in 2017 due in particular to the drag on investment from increased political and economic uncertainty following the Brexit vote, but doesn’t expect the UK to suffer a recession next year. It does, however, expect inflation to rise to around 2.7 per cent by the end of 2017 as the effects of a weaker pound feed through to consumers, squeezing real spending power.

While avoiding recession will be welcomed, the news is less positive when it comes to employment.

Paul Brewer, Government and Public Sector partner said: “For the UK, the ONS regional labour market data for June-August 2016 data shows the economic inactivity rate for 16-64 year olds falling from 22.1 per cent in June-Aug 2015 to 21.5 per cent in June-Aug 2016. This is the proportion of people neither in employment nor actively looking for work.

“For Scotland, the trend has moved in the other direction, with the inactivity rate for 16-64 year olds rising from 21.3 per cent in June-Aug 2015 to 22.3 per cent in June-Aug 2016.

“When you break down the Scottish figures, you see that the inactivity rate for men has only increased very slightly over this period from 17.9 per cent to 18.0 per cent, but the female rate has risen much more markedly from 24.5 per cent to 26.5 per cent.

“Our recent work on Good Growth suggests that the health of the working age population is one factor but there is a challenge here to identify why this is happening and what - if anything - can be done to address it.

“In addition to this, the economic output for Scotland is going to require further focus on the key sectors to ensure that the current flirting with recession is as close as we get.”

In comparison to the OBR forecast in March 2016, PwC’s main scenario projects that, in the absence of policy changes, public borrowing is likely to be persistently higher due to the net effects of the Brexit vote.

PwC projects a continuing budget deficit of around £67 billion this year, more than £10 billion above the OBR forecast, which would only fall to around £18 billion by 2019/2020 on unchanged fiscal policies, rather than moving into surplus as the OBR forecast in March (see table below).

However, this would still leave the Chancellor with a current budget surplus (excluding net public investment spending) of around 0.6 per cent of GDP in 2019/20, which would meet a revised fiscal rule similar to that initially adopted by George Osborne in 2010. The public sector debt to GDP ratio would also still be on a clear downward path by 2019/20 in PwC’s main scenario, so this does not look fiscally unsustainable.

John Hawksworth, chief economist at PwC, said: “We expect the Chancellor to adopt a pragmatic approach in his Autumn Statement, allowing borrowing to take the strain of slower growth, while adopting revised fiscal rules that give him more flexibility to boost planned public investment in priority areas such as housing and transport infrastructure. However, he doesn’t appear to have the money for large net tax cuts and is likely to continue to bear down on non-investment spending by both central and local government.”

Mr Hawksworth added: “A decline in business investment is likely to be the main reason for the slowdown in real GDP growth next year, driven in particular by uncertainty about the UK’s future trading relationships with the EU. But we expect Brexit to exert a long, slow drag on growth, rather than giving the economy a short, sharp shock.

“Businesses should therefore not be complacent about the impacts of Brexit just because the initial effect has been less negative than some had expected. However, this also gives companies more time to adjust their strategies to mitigate the risks associated with leaving the EU, while also seizing the opportunities that exist in the world beyond Europe.”

While PwC said the Brexit vote poses clear risks to the Britain’s trading position with the EU, there are also opportunities arising from the UK’s strength in tradable services and its relatively strong performance in exporting to non-EU countries since 2007.

Even before the Brexit decision, PwC’s latest analysis of export prospects suggested that the share of EU markets as a destination for UK exports of goods and services could fall from 44 per cent now to around 37 per cent by 2030 as trade shifted towards faster growing emerging markets. If the UK faces additional barriers to accessing EU markets post-Brexit, then this share could drop more quickly to 30-35 per cent by 2030.