Signs of a light for Scotland ... but challenges remain

?Signs of light…

The pace of economic growth in Scotland is set to pick up and match UK-wide performance in 2018, according to the EY Scottish ITEM Club 2018 Winter Forecast. Output growth for Scotland is predicted to reach 1.4 per cent next year, a sizable increase from the 0.8% expected out-turn for 2017 and equal to UK-wide GDP growth.

…but a long way to go…

While Scotland has weathered the worst of the storm following the fall in the oil price a few years ago, there is still a way to go to get to a level of growth that policy makers and citizens would be happy with. Scotland is on course for an annual average of 1.7% growth between 2018 and 2022, compared with 2% for the UK as a whole.

Even more striking is the outlook for employment. While employment growth in Scotland in 2017 was double the UK rate (2.6% compared with 1.3%) the outlook for Scotland in the future is weaker. In 2018, employment growth is forecast to slow to 0.4% and stagnate the following year. While it is expected to return to growth in 2020 it is to be limited to just 0.1% a year to 2022. Scotland is going to have to work hard to create employment growth.

…but a positive sector picture…

Private sector services will continue to drive growth in 2018, accounting for four fifths of growth with the fastest growing sub-sectors likely to be; professional, scientific & technical activities, administrative & support services and information & communication. After contracting in 2015 and 2016, the manufacturing sector is expected to make a positive contribution of 1% growth in 2018 and 2019 as well as an annual average growth of 1.3% during the next five years. This can be attributed to the continued expansion in world trade, a competitive exchange rate as well as increases in productivity.

…despite uncertainty…

Brexit is the biggest unknown factor in Scotland’s immediate economic future. If uncertainty around this issue eases and the UK government can provide greater clarity for business then an increase in business confidence and investment is possible.

..and demographic challenges…

Scotland’s overall population is set to experience slow growth as well as an absolute decline of 62,000 in its population of people of working age through tThe pace of economic growth in Scotland is set to pick up and match UK-wide performance in 2018, according to the EY Scottish ITEM Club 2018 Winter Forecast.

With the economy improving now is the time for Scotland to work through what needs to change to position it to prosper in the coming years. The UK as a whole faces a number of challenges including Brexit, low levels of business investment and the need to address technological change. o 2022. This is predominantly due to the country’s demographic profile but also because net inward migration is forecast to fall by more than half from 14,000 in 2017 to 6,000 in 2022.

…mean Scotland has to look after itself.

With the economy improving now is the time for Scotland to work through what needs to change to position it to prosper in the coming years. The UK as a whole faces a number of challenges including Brexit, low levels of business investment and the need to address technological change. This applies to Scotland as well but there are specific issues to attend to such as the demographic challenges and the need to develop Scotland’s own Industrial Strategy.

I have previously written about the Scottish Economic Strategy and its welcome focus on inclusive growth. Success will require economic growth to generate the resources to drive inclusion. For example, the Scottish Government should look to support more business start-ups and scale-ups which in turn will generate a much more dynamic and growing tax base to deliver the increase tax revenues required to meet the government’s social contract. This should seek to identify opportunities for investment outside of the main cities, aiming to spread economic opportunity more widely.

The decrease in the number of people of working age combined with a decline in migration will make it more challenging to generate faster economic growth. This highlights the importance of nurturing and attracting talent to Scotland for highly skilled, highly qualified roles. Scotland must ensure the country is an attractive place to live, work and do business. The extended powers available to the Scottish Government provide the opportunity to shape an environment where individuals and businesses can thrive. 

Download the EY Scottish ITEM Club 2018 Winter Forecast

@MarkGregoryEY

EY ITEM Club is part of our Economics for Business programme which provides knowledge, analysis and insight to help businesses understand the economic environments in which they operate.