Scottish economic growth in 2019 forecast to fall behind the UK as the labour market weakens and business investment falters – EY Scottish ITEM Club

Mark Harvey

While Scotland’s economy outperformed the UK in 2018 (1.6 per cent GVA growth versus 1.3 per cent GVA) the tables are set to turn next year with Scotland’s real growth predicted to slow by 0.6 per cent to 1.0 per cent GVA in 2019. In contrast, a modest increase in growth is expected across the UK from 1.3 per cent GVA to 1.5 per cent GVA for the same time period.

Similar to 2018, consumer spending is predicted to make a significant contribution to the Scottish economy in 2019. However, this is due to be fuelled by consumers running down their savings rather than through a growth in wages with personal disposable income forecast at 0.9 per cent and consumer expenditure at 1.0 per cent.

The working age population in Scotland is expected to fall by an average of 0.4 per cent per year over the next five years. Employment growth is also projected to be lacklustre, growing by 0.3 per cent in 2019 and averaging 0.3 per cent per year between 2018 and 2023 which is below the UK’s 0.5 per cent.

Mark Gregory, EY’s chief economist, said: “The pace of economic growth achieved in Scotland during the past year appears to be unsustainable as pressure mounts on the already delicate labour market and business investment remains subdued. Scotland has proved it can grow its economy faster than the UK but failing to invest in capital at this time will limit future growth and the possibility of outpacing the UK.

“Scotland’s population is growing at a slow pace, the working age population is ageing and working age migration is predicted to fall in Scotland by 55 per cent next year and by a total of 73 per cent through to 2022. Given Scotland is more reliant on migrant workers than other parts of the UK this collapse in the number of working age migrants is a significant challenge facing business and government.

“Maximising the potential of the domestic population is a priority and will require investment in skills and training as well as new technologies so that workers have access to the latest equipment and techniques. This is an agenda the Scottish Government is already engaged with but activity in this space needs to be accelerated from both government and business to address the immediate and long term challenges the labour market presents.”

Private services sector will continue to drive growth across Scotland, contributing more than 70 per cent of GVA growth in 2019. Within this group, professional, scientific and technical activities are predicted to be the most notable for Scotland with GVA growth of 2.7 per cent, edging ahead of the UK’s performance in this area (2.6 per cent GVA).

In terms of individual sectors, construction is forecast to have the highest growth rate at 3 per cent GVA, followed by professional, scientific and technical activities with information and communication in third place at 2.5 per cent GVA.

Mark Gregory said: “In 2018 manufacturing was projected to be Scotland’s fastest growing sector, accounting for a quarter of all growth but in 2019 a slowing global economy will impact the sector with growth expected to fall to 0.3 per cent. While this is predicted to result in falling employment levels this will be offset to some extent by construction which will take over as Scotland’s fastest-growing employer in 2019.”

Mark Harvey, EY Senior Partner for Scotland, said: “Scotland’s economic growth is showing signs of slowing and it is vital, particularly with Brexit on the horizon, it doesn’t stall. Business leaders are seeking greater certainty from government that creating a stronger economy is possible in the near future.

“Government cannot expect business to invest on a promise. They must analyse what they can do to make a more positive environment for investment; commit to it and create it.  On the skills front, there are many companies delivering outstanding training programmes in Scotland and opening the world of work to more people but this is not enough alone. Government must have a clear vision to amplify this across Scotland in a more integrated and collaborative way.

“Scotland has a good proposition for investors and has consistently proved this through record levels of inward investment but we must continue to improve what we have to offer domestic and international investors. Business is doing what it can given the current level of assurance from government to ensure stability. Confidence needs to be boosted and while there is no silver bullet a clearer vision for improving the economic environment from the Scottish Government would be welcomed.”

Glasgow is expected to emerge as the city leading economic growth in Scotland, ahead of Edinburgh and above the average growth rate for Scotland and the UK.

In 2018 Glasgow is on course to achieve 2.6 per cent GVA growth, then average 2.0 per cent per year through to 2021 compared with 2.1 per cent and 1.6 per cent respectively in Edinburgh. Meanwhile the Scottish average is predicted to reach 1.3 per cent which is 0.4 per cent behind the UK average per year through to 2021.

The growth in Glasgow can be attributed to a number of recent high profile investments delivered or agreed, many of which are in the financial services sector. Glasgow’s forecast growth of 2.6 per cent GVA in 2018 is expected to be matched only by Stirling, boosted by its resilient consumer sectors.