Resilient consumer spending may have helped the Scottish economy avoid a recession, but economic growth has been flat since Q2 of 2022 and will remain into 2024 when GVA is expected to rise by 0.3%, according to the EY ITEM Club Scottish Autumn forecast.
The forecast adds that sentiment among businesses and households remains fragile against a backdrop of persistent high interest rates and above-target inflation, despite the recent announcement by ONS that inflation appears to be decreasing.
The prospects are better for 2025 (Scottish GVA expected to rise by 1.3%) and 2026 (Scottish GVA expected to rise by 1.5%), with the economy expected to gain momentum. In part due to Scotland’s labour market demographics, growth will remain low in historical terms and is expected to lag the UK as a whole. However, when London is removed from the forecast, Scotland’s expected growth performance is similar to the rest of the UK.
Overall, a slight rise in unemployment is anticipated in 2024 to 4.2%, lower than the 4.5% forecast for the UK, whilst employment will remain broadly flat through 2024. Over the period 2024 to 2026 we forecast total employment to grow by an average of 0.6% per year, lagging the UK average of 0.9%.
According to the EY ITEM Club, in the face of a flatlining economy, the Scottish labour market has held up well but there are signs of softening. Wages have grown ahead of inflation, yet, employment faltered at the start of 2023 and recent indicators show that the growth in employees has levelled off, unemployment has risen – albeit from a historically low base – and the number of vacancies has decreased.
Commenting on this, EY Scotland managing partner Ally Scott said: “This year has seen a similar pattern to 2022, with periods of growth punctuated with points of decline. The net result is that while Scotland’s economy has avoided a technical recession so far this year – with a more resilient performance than expectations suggested – it was nevertheless slightly smaller at the end of Q2 2023 than it was a year earlier.
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“We expect to see promising signs in the economic outlook towards the end of 2024 into 2025 and 2026 as the economy gathers pace, lifting employment numbers above pre-pandemic levels.
“Scotland’s major cities are likely to perform better than the Scottish average thanks in large part to their sector profiles, with Edinburgh and Glasgow running ahead of the rest of the country in each year of the forecast. This, along with a weaker expectation for Aberdeen, continues a five-year trend leading up to the pandemic. However, we will watch with interest to see if recent policy and project developments for the North East – especially on construction related to energy transition – deliver a positive impact for both the local and wider Scottish economy.”