Mark Gregory
Mark Gregory

Stimulating business investment could help revive stagnating Scottish economy

Scotland’s economy is expected to deliver below par growth in 2017 as previously buoyant consumer spending fades and businesses remain reluctant to invest, according to the EY Scottish ITEM Club 2017 Summer Update.

The Scottish economy faces a challenging year in 2017 with growth predicted to reach 0.9% - half of the expected growth for the UK for the same period. Mounting pressure on consumers will impact the retail sector most with spending growth expected to slow to 1.1% in 2017 from 2.4% 2016.

However, the report says that there is a bright spot for manufacturing with output in 2017 predicted to grow in line with the total economy for the first time since 2013. All manufacturing subsectors are expected to grow as weaker sterling and a pick-up in global demand ultimately provide a boost to exports.

Employment in Scotland is forecast to continue to fall by 0.1% this year, followed by further decreases of 0.5% and 0.3% in 2018 and 2019 respectively.

Mark Gregory, EY’s Chief Economist, UK and Ireland, said: “Scotland’s economy is showing signs of slowing faster than the rest of the UK which sends a clear message that business and government will have to work harder and smarter to achieve sustained growth.

“The economy has to rebalance and shift away from a reliance on public funded major infrastructure projects. Sector diversification is also required to help move away from an over reliance on the oil and gas, construction and financial services sectors.”

The EY Scottish ITEM Club forecast says that despite a strong start to 2016, the activity of Scotland’s large retail sector has slowed and most recent sales figures show a decline since the middle of the year. Scottish retail sales in the first quarter of 2017 were just 0.2% higher than a year earlier while the comparable UK figure saw a 2.1% increase. At the same time the report says that with the household savings ratio reaching a record low of 2.6% in the last quarter of 2016, leaving it below the already low rate of 3.3% in the UK, Scottish households have little scope to fund an increase in consumer spending.

Dougie Adams, senior economic advisor to the EY Scottish ITEM Club said: “Consumer spending, which last year proved surprisingly resilient and helped buoy the economy, is fading. A weak labour market and rising inflation is putting further pressure on incomes and recent research reveals that households expect worsening economic conditions. All of this means consumers are likely to be more cautious.”

In 2016, Scotland’s GDP grew by only 0.4% while in contrast the UK as a whole experienced an increase of 1.8%. Moreover, the year finished on a downbeat note with Scotland’s onshore GDP falling by 0.2% in the final quarter.

Contractions in the production and construction sectors were responsible for Scotland’s weak GDP performance in 2016. The fall was most notable in construction with output down by 6% as a number of major projects that supported strong growth in 2014 and 2015 started to complete. Scotland’s production sector also made a significant negative contribution to growth in 2016 with a contraction of 5%, mainly due to a 7.3% decrease in manufacturing activity.

Some respite was provided by Scotland’s dominant services sector which increased output by 1.6% on the back of resilient domestic demand. However, services sector growth in Scotland was significantly behind the UK average.

Dougie Adams, said: “Scotland’s economy is stuck in the slow lane.  As flagged in previous EY Scottish ITEM Club reports, one factor is the ending of the outsized contribution to GDP growth from construction as many of the big ticket public sector funded infrastructure projects near completion. With consumers also under pressure, this means that stronger growth will require higher levels of businesses investment.”

Reflecting the weak growth picture over the last year, the number of people employed in Scotland has fallen. The employment rate is now more than one percentage point below the UK average.

Falling employment levels have largely been concentrated in manufacturing, extractive industries (such as mining and oil and gas) as well as parts of the public sector, the report says. There is also a lower level employment in administrative and support business services compared to a year ago - a sector that has generally grown across the UK. Losses in these sectors have been partially offset by gains in other parts of the Scottish economy, most notably in professional services, information and communications and sectors supported by rising consumer spending, including retail and leisure services.

Mark Gregory concluded: “Stimulating business investment in Scotland both in terms of physical assets and skills could deliver extensive, long-term economic benefits. This presents an opportunity for public and private sectors to define a new way of working together in order to drive further economic growth.

“Business investment is imperative to the long-term health and growth of the Scottish economy but is currently subdued. Government can help de-risk investment by supporting the development of skills and infrastructure that businesses need so that companies can feel confident they can maximise their investment.

“A collaborative approach between public and private sectors will ensure projects, proposals and investments are prioritised to deliver the biggest return in terms of skills, jobs, economic benefits, productivity, innovation and competitiveness.”