Scotland's 'anaemic' growth is lagging behind UK - towns and cities could be the saviour

Scotland’s economy is expected to grow twice as fast as previously predicted this year but will still lag the UK as a whole, a key report today reveals.

The EY Item Club summer forecast suggests that Scotland’s economic recovery is gaining momentum, providing “fertile conditions for growth”, though it also notes that the pace remains “anaemic” amid calls for further investment in infrastructure and city and town centres. The quarterly data indicates that Scottish gross domestic product (GDP) grew by 0.5 per cent in the first quarter of 2024, and the most recent estimate indicates that GDP output is at its highest level since before the pandemic.

The Scottish economy is expected to grow by 0.9 per cent for 2024 as a whole, up from a 0.4 per cent forecast in the previous quarter, but remain behind the UK with an anticipated annual growth rate of 1.1 per cent. The pace of growth north of the Border is expected to strengthen to 1.7 per cent in 2025, with 1.6 per cent anticipated in 2026 and 2027, compared to UK growth of 2 per cent in both 2025 and 2026, and 1.9 per cent in 2027, according to the EY think-tank.

EY said growth was likely to come from consumer-facing sectors, especially accommodation and food, largely driven by tourism.

The accountancy giant’s forecast comes just a day after official figures showed that Scotland’s GDP grew by 0.3 per cent in May, and by 0.9 per cent in the three months leading up to May.

EY said consumer-facing sectors had shown the strongest output growth in the latest quarter, with the services sector set to underpin the economic recovery while the industrial and production sector drags. That finding echoes this week’s regional growth tracker from Royal Bank of Scotland (RBS). It revealed a solid start to the second half of the year for the Scottish private sector, but with services firms and manufacturers experiencing differing fortunes.

EY noted that its monthly data added a “further degree of optimism” that Scottish economic growth was now on a sounder footing after the disappointing end to 2023 and the “stop-start” pattern of growth that has plagued the last two years. In May, the Scottish economy was 3 per cent larger than the average for 2019, prior to the pandemic, as output increased by 0.3 per cent, following growth of 0.2 per cent in April.

Ally Scott, EY Scotland managing partner, said: “The change in UK political leadership teamed with a vocal, UK-wide, pro-business vision of growth may currently be acting as a balustrade but our latest forecast suggests Scotland’s economy is on more stable footing than in previous years. While an upwards revision is to be welcomed, the level of growth and productivity remains arguably anaemic and collectively we should push for a more ambitious position.

Ally Scott, EY Scotland managing partner.

“As we’ve seen with previous forecasts, growth is predicted to come from consumer-facing sectors, especially accommodation and food, largely driven by tourism. This continued reliance on tourism, and Scotland as a destination, makes increased and sustained investment in infrastructure and city centres all the more vital.

“With consumer-facing sectors forecast to drive recovery, the implication is that it doesn’t take much of a headwind for that growth to recede. Depending on this source of recovery can be fragile, especially on the back of public finance messages from the Chancellor and how fiscal policy may impact consumer confidence and spending. All this points to an expedited industrial strategy being even more necessary to safeguard stable, wide-ranging, and sustained economic growth.”

EY Scotland’s managing partner for financial services, Sue Dawe, said the Scottish labour market continued to mirror problems seen at a UK level, though Scotland’s over-reliance on certain sectors meant those trends could be felt more acutely.

“For example, the structural concentration of manufacturing jobs in Scotland relative to other parts of the UK means the effects on the local employment market may have higher impact,” she noted. “Some concerning trends in apprenticeships and the young labour market are emerging with potential short and long-term impact. The apprenticeship model is well-known to be crucial to the manufacturing skills pipeline but is also gaining popularity in other business sectors.

“Financial services is crucial to a balanced economic growth trajectory in Scotland, not just as a growth sector in its own right but to enable all growth sectors to reach economic potential. We need to incentivise all levels of a skilled workforce to see Scotland as a place to build a successful career, rewarding life and contribute to a thriving, just, local economy.”

Yesterday’s figures from the Office for National Statistics (ONS) showed that from April to June, the estimated unemployment rate in Scotland for people aged 16 and older stood at 4.4 per cent. The employment rate was 73.4 per cent and the inactivity rate was estimated to be at 23.1 per cent.

The Scottish Government said the figures marked the highest number of payrolled employees in Scotland since July 2014.

Economy secretary Kate Forbes said: “[These] figures show the welcome news that payrolled employment and median monthly pay are at record highs. However, many households and businesses are still feeling the effects of harsh trading conditions and the global cost-of-living crisis.

“Over the current financial year, we are investing more than £5 billion to drive growth in the economy. We will continue to work with the UK government where we can, while encouraging them to support investment in Scotland’s economy and an end to spending cuts from Westminster.”