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Three surveys point to slowdown

Scotland poised for weakest growth for four years

Mark HarveyScotland’s policymakers face fresh challenges today with three reports warning of worsening prospects.

EY’s Scottish Item Club has downgraded Scotland’s GDP growth for 2016 to 1.2%, which is 0.6% below its last forecast six month ago.

Scottish Secretary David Mundell said the findings were “a cause for concern.”

The forecast coincides with a BDO report stating that growth expectations have fallen for a tenth month in a row.

In another warning for policymakers a third of the UK’s oil and gas firms are planning further job cuts this year as a result of a slump in prices, according to Bank of Scotland.

Contributing factors to EY’s downgrade include the challenging global trade environment, Scotland’s continuing vulnerability to the fallout from the oil price slump and the partly-related underperformance in key parts of the service sector.

The latest data reveals that Scotland is under-performing the rest of the UK by a greater margin than has been typical in recent years, although the gap is expected to narrow next year.

Dougie Adams, senior economic adviser to the EY Scottish Item Club, said: “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% expected from next year.

“In December, EY Scottish Item Club reported an unsustainable, over-dependence on the construction sector in Scotland for growth. This expansion is now easing, from a staggering 20% in 2014 to 11% in 2015, eroding the sector’s contribution of overall GDP growth.

“While undershooting UK growth is a familiar pattern for Scotland, the forecast growth gap in 2016 is much larger than has been typical in the last few years.”

Manufacturing is the one major sector where Scottish output growth in 2016 is forecast to match or outperform its UK counterpart. However, at 0.3%, growth in this sector still falls behind overall non-oil GDP. All manufacturing sectors managed to eke out some growth except the globally-challenged metals and machinery sector which is expected to experience a decline of 1% in output this year.

Border Biscuits Scottish food

At the other end of the scale, food and drink continues to deliver the best growth, with output anticipated to expand by 1.2% this year following on from 4.4% growth in 2015.

Mark Harvey (pictured), EY senior partner for Scotland, said: “A slowdown in Scotland’s growth is to be expected given the economic headwinds to be negotiated as well as the uncertainty presented by fluctuating global markets. From next year the country is poised for a significant increase in GDP growth with Scotland’s cities making a considerable contribution. The investment and development opportunities generated through the City Region Deals will be key to driving the future growth of Scotland’s economy.

“Scotland is an attractive investment proposition demonstrated by the record-breaking level of inward investment projects achieved in 2015, as reported in the latest EY Scotland Attractiveness Survey. The ability to secure more Foreign Direct Investment (FDI) projects than all other UK regions outside Greater London is a clear sign of Scotland’s economic strength and appeal to investors.”

Exports poised for change

Growth at the UK level and a better than expected performance of European economies has not filtered through to Scottish exports, with the struggles facing emerging markets adding to the challenges of some of Scotland’s key export sectors.  Despite a bright start to 2015, the overall volume of manufactured exports from Scotland to foreign markets fell by nearly 2% in the second half of the year.

Mr Adams said: “The weak global trade environment is making 2016 another tough year for exporters but, in line with the EY ITEM Club forecast for the UK, we expect to see better growth in Scotland’s international exports in 2017.”

Princes St shopping

Consumers remain the bright spot in the economy even though real-terms disposable incomes are expected to grow more slowly in 2016 than in 2015.  The expansion of 1.7% for this year will continue to be supportive of household budgets.  As a result, consumers’ expenditure is forecast to grow by 1.9% through the year, much the same rate of expansion as in 2015. 

Future prospects

Mr Harvey concluded: “Further rebalancing of the economy and a substantial increase to productivity is required for Scotland to increase growth. Local economic policies, increased powers through devolution and continuing stewardship from government will be instrumental in generating greater economic success in Scotland.”

Scottish Secretary David Mundell said: “The findings of the EY ITEM Club report are a cause for concern, and confirm the significant impact on the Scottish economy of the low global oil price.

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

BDO survey

The latest business trends report from BDO says business outputs and optimism about future growth have fallen as companies are uncertain of the economic direction.

This month’s report reveals that uncertainty ahead of the decision about Britain’s EU membership has cast a shadow over the economy with growth expectations amongst businesses falling for the tenth month in a row.

Martin Gill BDOMartin Gill (right), head of BDO in Scotland, said: “These figures highlight the dilemma company’s face at the moment. Uncertainty – both about the EU referendum but also wider economic concerns – has contributed to businesses’ expectation that economic growth will fall behind its long term trend for the first time in nearly three years.

“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. If businesses don’t foresee growth and a more optimistic outlook in the next few months then we could be in for a bumpy ride this autumn.”

Bank of Scotland survey

It  that found 43% of companies are planning further cost-cutting measures because of the downturn in the oil price, with 32% of businesses planning to cut jobs.

Scottish firms have been particularly badly hit by falls in oil prices, with 57% recording their business has been severely or quite badly affected against a UK-wide average of 41%.

Of the 141 companies questioned for the report, 58% have had to introduce efficiency measures or cut costs over the last 12 months while for 51% this has involved making redundancies.

 



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