Scottish growth will not resume until 2024 amid 'challenging economic conditions'

Challenging economic conditions could “stretch into the summer of 2023” experts have warned, with a new report stating Scotland will only return to growth next year.

Projections suggest gross value added (GVA) – a measure of the value of goods and services produced – will fall by 0.6% during 2023, with this decline largely concentrated in the first six months.

The latest EY Item Club Scotland forecast said cost of living pressures, coupled with shrinking real incomes, would mean sectors such as retail and housebuilding would be amongst those “most at risk”.

But the report said the economy is expected to return to growth in 2024, with GVA forecast to rise by 1.6% – with 2025 then projected to see GVA increase above pre-pandemic levels.

It comes after the global economic outlook “deteriorated significantly during 2022”, thanks in part to surging inflation and hikes in interest rates – which reduced consumer spending as well as business confidence.

New First Minister Humza Yousaf “will face a number of economic challenges”, the report said.

But it added that “fortunately, some global headwinds are alleviating”, noting that energy prices – particularly gas prices – are now “way off their summer 2022 highs”, while global supply chains are said to be “returning to normality”.

Overall, the report noted that globally there has been “some evidence of an improving outlook more recently, with falls in energy prices starting to drive down inflation, and economic activity holding up better than expected in the US and Europe”.

The experts said inflation is “likely to fall markedly during 2023”, adding that as a result the UK economy could return to growth in the second half of this year.

They also suggested the Bank of England’s monetary policy committee could cut interest rates before the end of this year.

Ally Scott, EY Scotland regional managing partner, said: “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.”

He said a return to growth is forecast for 2024, but Scotland would “continue to face some long-term challenges in demographics, such as the profile of our working-age population”.

He also stressed the need to “create an economic environment which inspires confidence to invest and grow differentially once more”.

Sue Dawe, head of financial services at EY Scotland, said economic conditions have been “up and down since the middle of last year”, with the expectation being that consumers will “make more use of savings accumulated during the pandemic throughout 2023”.

But she added: “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 the EY Item Club expects, there is a good chance interest rate cuts may be on the menu by the end of this year.”

A Scottish Government spokesman said: “Scotland continues to face extremely challenging economic conditions which are affecting livelihoods and lives. UK Government policies – including Brexit – have made the cost-of-living crisis worse.

“However, as this report highlights, Scotland performs well in a number of key growth sectors and also in attractiveness to inward investment. Latest data shows GDP in Scotland grew by 0.9% in January and, alongside improving consumer sentiment and near-record levels of employment, the economy is resilient.

“It is encouraging to see the report recognises the opportunities presented by the transition to net zero, which the Scottish Government has prioritised as part of our National Strategy for Economic Transformation.”