While challenging conditions are expected to continue during 2023, the Scottish economy should see a return to calendar year growth in 2024.
Gross Value Added (GVA) is predicted to rise by 1.6%, helped by a 2.3% increase in consumer spending, as employment and real wages recover, according to the latest EY ITEM Club Scotland Forecast.
Scottish GVA is anticipated to fall by 0.6% in 2023, with decline largely concentrated in the first half of the year. Some sectors can expect to see growth though, led by health and social care (1.2%), education administrative and support services (1.1%) and public administration (0.8%).
Marginal rises are also forecast in the professional, scientific, and technical sector (0.3%), as well as in construction (0.1%).
Scotland’s economy grew strongly in 2021 as it recovered from the pandemic, before slowing in the second half of last year. EY estimates that Scotland’s GVA rose 5.3% in 2022, a slowdown from 7.9% in 2021, with 2022’s growth concentrated in the year’s first half.
This pattern broadly mirrored the experience of the UK - and of much of the world - reflecting the impact on the global economy caused by the war in Ukraine and its consequences for confidence, supply chains, energy prices and inflation.
Based on the latest forecast, it will be 2025 before Scotland’s GVA is expected to finally climb above where it was pre-pandemic.
Ally Scott, EY's Scottish managing partner, explained: “While challenging conditions are expected to stretch into the summer of 2023, we are starting to see signs in a number of areas which give cause for optimism – energy prices are falling and the economy has proved to be more resilient than expected.
“A return to calendar year growth is forecast in 2024, but Scotland will continue to face some long-term challenges in demographics, such as the profile of our working-age population.
“However, there are also some exciting opportunities that must be grasped if Scotland is to catch the next bounce of the ball in terms of local economic growth.
“Growth opportunities can be created by building on Scotland’s world-class strengths in financial services, life sciences, software and technology,“ he continued, adding: “There are also clear natural advantages in navigating the transition to net zero - by industry and society - using established and emerging skills to move from traditional hydrocarbons and towards clean energy and renewables.”
Sue Dawe, head of financial services for EY Scotland, said: “Conditions have been up-and-down since the middle of last year, and it’s anticipated that consumers will make more use of savings accumulated during the pandemic throughout 2023.
“However, net savings are a diminishing asset, especially in a year in which borrowing has become very expensive due to higher interest rates.
“That said, recent declines in some prices suggest that inflation will weaken during this year and, if it falls as quickly as we expect, there is a good chance interest rate cuts may be on the menu by the end of this year.”
According to the EY forecast, the majority of sectors are likely to experience rising output in 2024 and beyond.
The sector that is projected to lead the way is information and communications, reflecting a similar story at the UK level. Also likely to be experiencing stronger than average growth in 2024 are accommodation and food services, and arts, entertainment and recreation, as these sectors rebound from 2023.
Another sector that is expected to experience above-average growth is professional, scientific and technical services. Like information and communications, this sector is on a long-term upward trend, and is also a sector in which customers often look to local suppliers.
The EY ITEM Club forecasts a marginal rise in construction sector output in 2023, but a fall in the sector’s employment. The fortunes of the construction sector are tied to the broader Scottish economy, and the sector tends to be interest-rate sensitive.
The forecast also suggested that consumer sentiment will remain a key point of focus.
High inflation will continue to squeeze real disposable incomes this year, with the report forecasting a fall in consumer spending. But as inflation falls throughout 2023, the drag on real incomes should begin to abate.
Last year saw a decline in Scottish business confidence, mirroring the fall in consumer confidence.
Unsurprisingly, there have been significant variations across different sectors, which were already apparent before parts of the global economy began to slow in the second quarter of 2022.
The largest increase in GVA was achieved by the professional, scientific and technical sector, but there was also relatively strong growth in information and communications.
In contrast, the administration and support services sector, which includes people employed via agencies, saw declining output of -0.8% from the second to fourth quarters last year.
Among the more positive developments in the Scottish economy in the past year has been a gradual improvement in exports of manufactured products, including exports to the rest of the UK, EY added.
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