No-deal Brexit poses ‘immediate’ threat to Scottish economy

A no-deal Brexit could have “immediate, real and adverse impacts” on trade in Scotland, a new report has warned.

Demonstrators outside Bute House in Edinburgh ahead of a meeting between Nicola Sturgeon and Boris Johnson

It comes as the UK Government is stepping up its preparations for a possible no-deal Brexit, with new Prime Minister Boris Johnson having pledged the UK will be out of the EU by 31 October “do or die”.

The report also warned skills shortages could increase in part due to a fall in migrant workers coming to Scotland, with this “connected to the challenges created by Brexit”. It forecast that 2019 “looks set to be a disappointing year”, with economic growth in Scotland, excluding the oil and gas sector, predicted to fall from 1.3 per cent in 2018 to 1 per cent. The report added: “Overall, Scottish growth between 2019 and 2022 will be slightly weaker than for the UK as a whole.”

A no-deal Brexit continues to be the “most obvious” risk to the economy, with the EY Scottish ITEM Club summer forecast stating: “Even if a deal is agreed in the coming months, there will still be difficult trade negotiations to follow - while other global worries mean Scottish companies are likely to remain very cautious in their investment and employment decisions.”

Unlike the UK - where GDP growth fell from 1.8 per cent in 2017 to 1.4 per cent in 2018 - Scotland avoided a marked economic slowdown last year. This was in part due to a “manufacturing mini-boom” north of the Border, although the report warned this “looks unlikely to persist through 2019”.

With the world economy expected to grow more slowly this year, EY said Scotland was “likely to share in the global pattern”.

Brexit uncertainty was “almost certainly a major cause” of weak confidence, although the report also highlighted concerns about income tax rates on higher earners, which are higher in Scotland than the rest of the UK, and the possible introduction of new charges such as the workplace parking levy.

The report said “while there are some domestic risks” to the economy, “the main risks to the forecast originate beyond Scotland - particularly in the immediate short-term”.

It stated: “The most obvious continues to be a no-deal Brexit which, because of the delays that have already taken place, might hit economic growth in the second half of 2019 or, more probably, 2020 and beyond.”

The report added: “A switch to World Trade Organisation (WTO) trading rules would have immediate real and adverse impacts on Scottish exports, and probably on the cost and availability of imports.

“A consequent sharp fall in the exchange rate would, over time, also raise inflation and hence squeeze real household incomes, with the latter also affected by job losses.”

An anticipated rise in the number of Scots in work could boost employment by a “modest” 0.6% in 2019, after falling by 2% last year.

By 2022, employment could rise to just under 2.8 million, compared to slightly above 2.1 million in 2018.

But the report also warned the decline in the number of working-age people coming to Scotland was “speeding up”.

Migration peaked at 31,000 in 2016, the report said, with this dropping to 23,00 in 2018 - but by 2022 it is expected to have fallen to below 8,000.

“Scottish companies could therefore face growing issues over skill shortages - which may in turn increase the rate of introduction of robotics and artificial intelligence technologies.” the report said.

Overall, it concluded firms are “likely to remain cautious with respect to both investment and employment decisions”.

The report added: “Weak employment will in turn dampen consumer confidence and spending, providing further justification for companies’ initial caution. Hence, their lack of confidence becomes self-fulfilling.

“This is a major reason why, after growth of just 1.3% in 2018, we forecast that Scotland’s non-oil GDP will increase even more slowly in 2019, with a projected rise of only 1.0%.

“To put this in perspective, Scotland’s growth has been below 1% in six of the past 10 years and has averaged 0.7% over that period.”

EY Scotland’s managing partner Ally Scott said: “Scottish consumer confidence and business sentiment are expected to weaken this year, with the global economy and Brexit uncertainty major causes.

“Even if a Brexit deal is agreed in the coming months, difficult trade negotiations are likely to follow.

“This, combined with other global worries, means that Scottish companies are likely to remain very cautious in their investment and employment decisions.”