Gloomy forecast for Scotland's economy after oil price slump

Scotland's economy has slowed sharply and risks stalling this year as businesses struggle with the oil price slump, a top think-tank has warned.

Experts said the Scottish economy was being buffeted by factors including the fallout from the weak oil price, challenging global trade and underperformance in key parts of the powerhouse services sector. Picture: PA

Economists now expect growth to be the poorest since 2012 after slashing forecasts for the current year.

The EY Scottish Item Club – the only major economic body to use the UK Treasury’s forecasting model – estimates Scotland’s economy will expand by 1.2 per cent in 2016, down from an earlier forecast of 1.8 per cent. That compares with a downwardly-revised 2 per cent forecast for the UK economy flagged by Chancellor George Osborne in his March Budget.

Scotland suffered a shorter and shallower recession than the UK’s, but the economic recovery north of the Border has trailed the rest of Britain. Experts said the Scottish economy was being buffeted by factors including the fallout from the weak oil price, “challenging” global trade and underperformance in key parts of the powerhouse services sector.

While robust consumer spending has been helping to prop up activity, economists warn that confidence remains fragile.

In a further blow, today’s Business Trends Report from accountancy firm BDO shows subdued activity in three of Scotland’s most important industrial sectors. Construction, manufacturing, and oil and gas have all reported reduced activity, and business optimism has plummeted.

Dougie Adams, senior economic adviser to the EY Scottish Item Club said: “While it is not our expectation at the moment, it would not take much of an accident somewhere in the world economy to undermine growth altogether. The global economy is fragile and if confidence got a shake then consumer spending could become an issue.”

He said the Item Club report was based on current economic policies and did not have the scope to go into what a Brexit vote would mean.

But he remained upbeat: “Scotland now faces a third consecutive year of slowing GDP growth in 2016. But as the negative impact of the oil price bust on growth fades in 2017 and 2018 the pace of expansion should pick up, with an output increase of 2 per cent expected from next year.”

Scottish Secretary David Mundell described the report’s findings as a “cause for concern”, which confirmed the “significant impact” on the Scottish economy of the low global oil price.

He said: “The UK government is determined – working with the Scottish Government – to do everything possible to boost Scotland’s economy, its productivity and protect jobs.”

According to the BDO research, businesses in Scotland and across the UK fear the economy “is not going anywhere while the European Union referendum result remains unknown”.

BDO’s output index – which reflects companies’ experience of orders on hand – has fallen below the level that indicates long-term trend growth for the first time since 2013. The employment index, which highlights firms’ intentions to hire, has dropped well below the level seen in the same month last year.

Martin Gill, head of BDO in Scotland, said: “A reduction in output and optimism cannot just be put down to uncertainty due to the EU referendum and may have some more deep-rooted causes. We need to see greater investment and higher productivity to improve capacity, encourage growth and ultimately drive up living standards.”

The forecasts come as a study by Bank of Scotland suggested that almost half of UK oil and gas firms are planning further cost-cutting to help manage the impact of the downturn.

Jackie Baillie, Scottish Labour’s economy spokeswoman, said: “These figures underline the devastating impact the oil crisis has had on workers in the North-east and right across the supply chain.”