As good as it gets?

After several challenging years, Scotland’s economy bounced back and outperformed the UK in 2018 with expected 1.6% GVA (Gross Value Added) growth versus 1.3% for the UK as a whole. However, the tables are set to turn next year with Scotland’s real growth predicted to slow by 0.6% to 1.0% GVA in 2019 according to the latest EY Scottish ITEM Club Forecast. In contrast, a modest increase in growth is expected across the UK from 1.3% to 1.5% GVA for the same time period.

The services sector will continue to drive growth across Scotland, contributing more than 70% of GVA growth in 2019. In terms of individual sectors, construction is forecast to have the highest growth rate at 3% GVA, followed by professional, scientific and technical activities at 2.7% with information and communication in third place at 2.5% GVA.

In 2018 manufacturing has accounted for a quarter of all Scottish growth but in 2019 a slowing global economy will impact the sector with growth expected to fall to 0.3%. 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, supporting 15,000 additional jobs by 2023.

…as weaknesses create challenges…

While Scotland’s performance in 2018 is a welcome recovery, this pace of economic growth appears to be unsustainable as there are underlying weaknesses that will act as a drag on future growth.

Most obviously, 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% and consumer expenditure at 1.0%. Consumers cannot continue to finance spending out of savings for long periods of time, hence there is a need to create the conditions for real wage growth.

This leads us on to the challenges posed by the already delicate labour market and the subdued level of business investment. Scotland has proved it can grow its economy faster than the UK, but it needs to invest in capital and the skills of its workforce to avoid limiting future growth.

…with the labour market centre stage…

The working age population in Scotland is expected to fall by an average of 0.4% per year over the next five years. Employment growth is also projected to be lacklustre, growing by 0.3% in 2019 and averaging 0.3% per year between 2018 and 2023 – below the UK’s 0.5%. 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% next year and by a total of 73% 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.

This means maximising the potential of the domestic population is a priority and will require investment in skills and training by both public and private sectors as well as in 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 by all sides to address the immediate and long-term challenges the labour market presents. If this can be achieved, then there will be scope to share the benefits of higher productivity through higher real wages, providing a sustainable boost to consumers.

…requiring a clear roadmap..

Scotland’s economic growth is showing signs of slowing and it is vital, particularly with Brexit on the horizon, it doesn’t stall. The business leaders I talk to are seeking greater certainty from government that creating a stronger economy is possible in the near future.

It is certainly true that 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 of 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 it must continue to improve what its offer is to both domestic and international investors. Confidence needs to be boosted and while there is no silver bullet a clearer vision for improving the economic environment from the Scottish Government is the obvious starting point.