Scottish economy set to stall and house prices to fall - PwC

The global accountancy firm predicts that Scottish GDP growth will decelerate to around 1.3 per cent in 2016 and 0.3 per cent in 2017, as described in its latest UK Economic Outlook report.

The report also projects that the UK GDP growth will also decelerate to around 1.6 per cent in 2016 and 0.6 per cent in 2017.

PwC cited a projected decline in business investment, particularly from overseas in areas such as commercial property as the main reason for the slowdown.

Construction companies and capital goods manufacturers could also be relatively exposed to this kind of short-term cyclical slowdown, the firm said.

Consumer spending growth is projected to hold up better, but could still slow from previous strong rates, dropping to around 1.3 per cent in 2017 in PwC’s main scenario.

This reflects the impact of a weaker pound in pushing up import prices and squeezing the real spending power of households, as well as lower consumer confidence levels and slower jobs growth.

The weaker pound should also boost net exports, however, which should move from being a drag on GDP growth in 2015 to a positive contributor in 2017. This should also see the UK current account deficit begin to shrink from recent high levels.

Adam Turner, Government and Public Sector assistant director, PwC in Scotland, said: “The picture on housing is sobering and timely as we see the end of ‘the right to buy’ scheme at the end of this month. For first time buyers, our latest analysis is bittersweet. Yes, they don’t have to save as long to afford a deposit for their first home as in our previous forecasts – but it’s still going to take them an astonishing 19 years if they don’t have family assistance. For comparison, in 1990 it took two years to save for a deposit for a home, while in 2000 it took six years.

“Those already on the property ladder are in a slightly better place as they have been largely insulated from the deterioration in affordability due to capital gains made on their existing homes. But even these so-called ‘second steppers’ are seeing an increase in the time they need to save before moving on meaning an even tighter supply of homes for first time buyers as people stay put for longer.

“The only long-term solution for Scotland is to build vastly more affordable, quality housing in in the places where people want to live. This could eventually lead to a situation where earnings growth again starts to outstrip house price growth, sustainably bringing down affordability for those stuck in generation rent.

“But such a shift is likely to be the work of decades not years. With people in rented accommodation for longer, an important priority in the interim should be to increase the quality, choice and security of rented accommodation so this becomes a more attractive option as it is in countries like Germany or Switzerland where professional institutional investors play a much bigger role.”

Service sector growth will slow but should remain positive in 2016-17, but construction will suffer from lower investment levels. Capital goods manufacturers will suffer for the same reason, but some manufacturing exporters will benefit from the weaker pound.

In the Deals/M&A market the current ‘pause’ should end after companies deal with currency fluctuations and see what opportunities present themselves.

Lindsay Gardiner, regional chair at PwC in Scotland, said: “Given what we are seeing here and in the recent Fraser of Allander report, Scotland is skirting very close to recession and while it is going to be a challenging few months, the country should avoid it.

“But as with the recent Fraser of Allander report, our research is showing that it is the services sector driving growth as manufacturing and construction have peaked for the moment.

“What we have to be wary of in Scotland is an over-reliance on the service sector because even though the service sector registered growth of 0.3% in the final quarter of last year, UK services grew three times faster and performance in all principal private subsectors in Scotland is appreciably weaker than their UK counterparts. Financial services are especially weak and the weakness of business services growth has been exacerbated by the effects of the fall in the price of oil.

“As the UK now has a new cabinet and PM, who has stated she will proceed with Brexit, there is less uncertainty now than there has been for a few weeks and that is a good thing but there is still much uncertainty ahead as we now enter the areas of working out the best deal for the UK with Europe and what potential spin-offs that may mean for Scotland.

“While our modelling sees the UK avoid recession, it would be prudent of businesses to make plans for recession scenarios, where they can. We’ve seen all-too-recently how companies can be impacted if there is a lack of scenario planning – very few anticipated the referendum outcome – so this time it would be prudent for businesses to look ahead.”

PwC also said it expects the price of an average home in Scotland to fall over the next two years, bucking the UK national trend of rising property prices. But, from 2018 onwards, property prices are projected to recover, rising to £156,000 by 2020.

PwC’s research into housing affordability for generation rent (the 20-39 year old age group who are finding it increasingly difficult to get on the housing ladder) shows that buyers may have to save for as much as 19 years in order to buy their first home (assuming the deposit has to be raised entirely from their own savings without family assistance). This has trebled since 2000 when the same group would have been able to buy after saving for just six years although it is down from previous forecasts of 21 years.

The analysis finds a huge disparity in outcomes between renters and those 20-39 year olds who have already managed to get a foot on the housing ladder. This second group who already managed to buy has been largely insulated from the deterioration in affordability due to capital gains made on their existing homes and continued relatively low mortgage rates.

PwC estimates that someone buying their first home in 2016 could afford to step up to a larger property after only around four years, less than a quarter of the time it could take to save for an initial deposit as a renter.

“Collaboration among developers, social housing providers and government alongside radical and innovative investment measures will be key to solving Scotland – and the UK’s – housing market challenge.”