Forecast for Scottish economy upgraded for 2023, but picture beyond loses shine, says Fraser of Allander Institute

The Scottish economy has performed better than was expected only a few months ago, according to the high-profile Fraser of Allander Institute economic think tank, which has majorly upgraded its forecast for this year as a result.

The organisation, which is part of the University of Strathclyde, has just unveiled its latest quarterly economic commentary, which it says includes an assessment of all the latest key data on the UK and Scottish economies.

In the Deloitte-sponsored economic commentary, the Strathclyde researchers have set out their new forecasts, now expecting growth of 0.5 per cent in 2023 – a “significant” revision up from its previous set of forecasts in March, which indicated that by now Scotland’s economy would be in a shallow recession. The Scottish Government has said the nation’s onshore gross domestic product is estimated to have fallen by 0.5 per cent in April, following contraction of 0.1 per cent in March.

However, the Institute’s outlook for 2024 and 2025 has worsened, at growth of 0.7 per cent in 2024, and 1.2 per cent in 2025, saying this reflects “stubbornly-high” inflation and the continued response from the Bank of England in raising interest rates, which are now at 5 per cent, and further rises “likely”, rather than peaking at 4.75 per cent as expected in March.

Professor Mairi Spowage, director of the Institute, said: “Confounding our expectations, consumer spending has remained pretty resilient in the first quarter of [this] year. There is some evidence that this is being supported by increased borrowing, which may be a concern for the resilience of consumers as we move through the year.”

She also said consumers may face higher prices. “All of the evidence we have looked at in this edition would support that, in the main, businesses have been trying to absorb costs rather than pass them on to their customers,” the economic expert said. “The signs are that more of them will have to pass through costs soon, though, which may lead to further price rises for consumers.”

Challenges

Douglas Farish, office senior partner for Deloitte in Edinburgh, also looked at the outlook for firms, saying: “While Scotland’s economic performance has exceeded expectations from just a few months ago, challenges for businesses will persist throughout this year because of ongoing high inflation and rising interest rates.

Professor Mairi Spowage, director of the Fraser of Allander Institute, said: 'Confounding our expectations, consumer spending has remained pretty resilient in the first quarter of [this] year.' Picture: contributed.

“With a still-challenging economic environment, businesses are focused on costs and have remained cautious about investing. Focus must now turn to strategies to navigate the challenges that this presents. Tapping into the resilience developed over the last few years, while also fostering productivity and developing skills, will be essential to help mitigate the current economic climate’s impact on business operations now and over the longer term.”

The commentary also addresses the Scottish Government’s Medium Term Financial Strategy (MTFS). Emma Congreve, deputy director of the Institute, said: “The MTFS sets out that there is currently a £1 billion gap between the funding that the Scottish Government is expecting through the block grant and tax receipts and the money they require to meet their existing commitments. What is clear is that the Scottish Government are trying to manage expectations of both those it funds and those who hold it to account – essentially saying that the budget round for 2024-25 is going to be difficult and very challenging.”