Scotland’s economy is set to gain momentum this year with the prospect of interest rate cuts from May onwards, a continuing fall in inflation, and decreasing energy prices. Continued growth in pay and easing pressure on household finances should also boost consumer sentiment, according to the EY ITEM Club Scottish Winter forecast.

Scottish GVA growth is expected to be 0.7% in 2024, marking a considerable improvement compared to 0.1% in 2023, bringing it closer to the UK outlook (0.3% in 2023 and 0.8% in 2024). GVA growth prospects in Scotland are expected to improve even further to 1.4% in 2025 and 1.6% in 2026 and 2027.

News about inflation has also been more positive, with the consumer prices index (CPI) measure falling to 3.9% in the year to November 2023. Despite a slight rise to 4.0% in December, the significant fall in the rate of annual inflation during the quarter should have helped support growth in Scotland.

Scotland’s sectoral growth

As economic conditions and confidence improves, private sector services are set to drive growth from 2025 onwards. Among these, information & communication is set to lead returning annual GVA growth of 2.8% in 2025. Activity in other key business service sectors should also gather pace in 2025, most notably administrative & support services and professional, scientific, and technical services, returning growth of 1.8% and 1.7% respectively.  The recovery in household confidence and spending over the medium-term will support growth in consumer-facing services, with accommodation and food services and wholesale and retail, posting above average employment growth over the 2024-27 period.

Tightening of the Scottish labour market and employment prospects

The Scottish labour market remains resilient as unemployment remains low and the outlook is anticipated to improve in 2025 with growth across most sectors. However, it is expected that over the longer-term, employment prospects will be dampened by weak demographic growth, particularly compared to the rest of the UK.

Businesses continue to report recruitment difficulties, with high rates of inactivity and economic uncertainty limiting the supply of candidates. The ONS Business Insights and Conditions Survey continues to report that Scottish businesses are struggling to recruit staff, with 36.8% of applicable businesses in November 2023 reporting difficulties recruiting employees. These issues are most acute in manufacturing, accommodation and food, and construction.

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Commenting on this, EY Scotland managing partner, Ally Scott, said: “Although economic growth has been relatively flat, Scotland is slowly moving in the right direction with a brighter outlook expected for sectors such as information and communication, energy, and consumer-facing services. That said, there has been a softening in investor sentiment and challenges noted in the labour market, with employment growth remaining low and lagging the UK. 

“In what is already a constrained labour market in Scotland, the incremental increases in income tax have created a meaningful tax cross-border divide, which includes a significant number of NHS professionals, senior teachers and other civil servants. This is now a major concern for employers in Scotland looking to retain talent in an already tight skilled labour market. If these growth sectors hold the careers of the future for Scotland, then we need an environment that encourages investment and promotes business, not one that creates barriers for growth or impacts competitiveness.”