Scotland could be stifled by 'harsh winter', despite UK productivity outperformance - PwC

Scotland’s economic growth could be stifled by a “harsh winter”, despite the country ranking as one of the highest productivity parts of the UK, a new report suggests.

Releasing its latest economic outlook, accountancy giant PwC predicts that growth in Scotland will sit approximately 0.5 percentage points behind the UK average this year and, like the rest of the UK, will be highly dependent on gas prices.

The firm has made projections based on two scenarios. A “mild winter” would see a recovery of some supply of Russian natural gas exports, a reduction in gas prices to their September starting level, and where the UK government provides considerable support in response to the cost of living crisis.

Meanwhile, a “harsh winter” scenario is based on the supply of Russian natural gas exports to Europe remaining highly disrupted, with gas prices remaining around their recent high point, and where the UK government’s support is more considerable than the mild winter scenario but less able to mitigate the adverse impact of high gas prices.

Scotland is likely to report growth of between 3.1 per cent in the mild scenario and 2.6 per cent in the harsh scenario by the end of 2022, followed by two years of slow, or even negative, real GDP growth.

PwC’s expectation for the UK as a whole is that year-on-year changes in economic output will range between -1.3 per cent to 0.2 per cent in 2023 and between -0.3 per cent to 0.6 per cent in 2024 under the harsh and mild winter scenarios, respectively.

The outlook also projects a highly variable peak inflation rate, depending on the outlook for volatile energy prices.

Factoring in the freeze on the household energy cap, inflation could peak at between 10 per cent and 13 per cent.

Of all 12 regions studied as part of the UK-wide analysis by PwC, Scotland was only behind London and the south-east of England in terms of productivity. Picture: Jeff J Mitchell/Getty Images

Jason Morris, regional market leader at PwC Scotland, said: “Like the rest of the UK, it is now likely that Scotland will enter recession this year despite posting higher growth in the first half of the year.

“Both businesses and consumers could be facing two very difficult situations in the shape of a potential five-decade high in the inflation rate, and the largest fall in real wages since records began.

“With average income levels sitting below the national average, and due to the fact that lower income households tend to see a higher budget share on fuel and food, there’s a real risk that households in Scotland could feel the impact more keenly.

“Inflation forecasts have changed rapidly in recent weeks, driven mainly by the market price of natural gas. Until this market regains stability, predictions on the inflation outlook will remain difficult. It presents a challenging environment for businesses to plan, mitigate and adapt.”

The outlook investigates the regional productivity gap, which measures gross value added (GVA) differences in output per hour for each worker across UK 12 regions.

Of all 12 regions studied as part of the UK-wide analysis, Scotland was only behind London and the south-east of England in terms of productivity.