Press release

29 Mar 2023

Scottish economy expected to return to calendar year growth in 2024, says EY Scottish ITEM Club Forecast 

Projections suggest Scottish Gross Value Added (GVA) will fall by 0.6% during 2023, with decline largely concentrated in the first six months

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Related topics Finance Growth Workforce
  • Projections suggest Scottish Gross Value Added (GVA) will fall by 0.6% during 2023, with decline largely concentrated in the first six months
  • Falling energy prices, resilient economy and business confidence showing signs that pressure points should ease in second half of this year
  • Cost of living and shrinking real incomes predicted to affect consumer-facing sectors, such as retail and housebuilding
  • GVA expected to return to calendar year growth in 2024, rising by 1.6%, with key service sectors leading the way
  • Scottish economy anticipated to lag behind the UK thanks to demographics challenges, such as Scotland’s working age population, but opportunities are there

EDINBURGH, WEDNESDAY 29 MARCH 2023 -  While 2023 is expected to play host to continued challenging conditions, the Scottish economy should see a return to calendar year growth in 2024 with Gross Value Added (GVA) rising by 1.6%, helped by a 2.3% increase in consumer spending, as employment and real wages recover. This is according to the latest EY ITEM Club’s Scotland Forecast.

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Scottish GVA is anticipated to fall by 0.6% in 2023, with decline largely concentrated in the first half of the year. Some sectors can expect to see growth, led by health and social care (1.2%), education administrative and support services (1.1%), and public administration (0.8%) (page 22). Marginal rises are also forecast in professional, scientific, and technical sector (0.3%), as well as in construction (0.1%).

Scotland’s economy grew strongly in 2021 as it recovered from the pandemic, before slowing in the second half of last year. The EY ITEM Club estimates that Scotland’s GVA rose 5.3% in 2022, a slowdown from 7.9% in 2021, with 2022’s growth concentrated in the year’s first half. This pattern broadly mirrored the experience of the UK – and of much of the world – and reflected the impact on the global economy caused by the war in Ukraine and its consequences for confidence, supply chains, and energy prices and inflation.

Based on the latest forecast, it will be 2025 before Scotland’s GVA is expected to finally climb above where it was pre-pandemic. 

Ally Scott, EY Scotland Regional Managing Partner said: “While challenging conditions are expected to stretch into the summer of 2023, we are starting to see signs in a number of areas which give cause for optimism – energy prices are falling and the economy has proved to be more resilient than expected.

“A return to calendar year growth is forecast in 2024, but Scotland will continue to face some long-term challenges in demographics, such as the profile of our working-age population. However, there are also some exciting opportunities that must be grasped if Scotland is to catch the next bounce of the ball in terms of local economic growth.

“Growth opportunities can be created by building on Scotland’s world-class strengths in financial services, life sciences, software and technology. There are also clear natural advantages in navigating the transition to net zero – by industry and society – using established and emerging skills to move from traditional hydrocarbons and towards clean energy and renewables.

“It’s important we create an economic environment which inspires confidence to invest and grow differentially once more. We know this can generate strong positivity across Scotland, especially when coupled with our high attractiveness – both globally and within the UK – as a place to live, work and do business.” 

Sue Dawe, Head of Financial Services for EY Scotland said: “Conditions have been up-and-down since the middle of last year, and it’s anticipated that consumers will make more use of savings accumulated during the pandemic throughout 2023. However, net savings are a diminishing asset, especially in a year in which borrowing has become very expensive due to higher interest rates. That said, recent declines in some prices suggest that inflation will weaken during this year, and if it falls as quickly as the EY ITEM Club expects, there is a good chance interest rate cuts may be on the menu by the end of this year.

“As always, Scotland’s financial services sector will continue to work with businesses and communities to support them through headwinds and maximise the opportunities available as we work together towards economic growth.”

Scotland’s sectoral economic outlook

According to the EY ITEM Club forecast, the majority of sectors are likely to experience rising output in 2024 and beyond. The sector that is projected to lead the way is information and communications, reflecting a similar story at the UK level. Also likely to be experiencing stronger than average growth in 2024 are accommodation and food services, and arts, entertainment and recreation, as these sectors rebound from 2023. These should benefit from a combination of continuing improvements in visitor numbers, increased lengths of stay, as well as increased spending by Scottish residents, as the cost of living crisis recedes.

Another sector that is expected to experience above-average growth is professional, scientific and technical services. Like information and communications, this sector is on a long-term upward trend, and is also a sector in which customers often look to local suppliers. As such, Scottish companies in the sector are likely to benefit from the overall rise in demand from their home market in 2024.

The EY ITEM Club forecasts a marginal rise in construction sector output in 2023, but a fall in the sector’s employment. The fortunes of the construction sector are tied to the broader Scottish economy, and the sector tends to be interest-rate sensitive. As such, the EY ITEM Club says the modest change for 2023 as a whole may well involve a significant contraction in the first half and a rebound in the second half of the year – if the expected interest rate cuts materialize in this year’s final quarter. 

Consumer and business confidence

The EY ITEM Club forecast says that consumer sentiment will remain a key point of focus. High inflation will continue to squeeze real disposable incomes this year, and the report forecasts a fall in consumer spending. But as inflation falls throughout 2023, the drag on real incomes should begin to abate.

2022 saw a decline in Scottish business confidence, mirroring the fall in consumer confidence. The PMI composite index of economic activity peaked in May 2021, at 61.5. The latest figures for January and February 2023 were 47.1 and 51.0 respectively, and the trend now appears to be upwards. These latest Scottish numbers are marginally below the equivalent figures for the UK and the EY ITEM Club says the narrowness of the gap testifies to how the current challenges for the Scottish economy are part of a wider story.

Unsurprisingly, there have been significant variations across different sectors, which were already apparent before parts of the global economy began to slow in the second quarter of 2022. The largest increase in GVA was achieved by the professional, scientific, and technical sector. But there was also relatively strong growth in information and communications. In contrast, the administration and support services sector, which includes people employed via agencies, saw declining output of -0.8% from Q2 to Q4, 2022.

Among the more positive developments in the Scottish economy in the past year has been a gradual improvement in exports of manufactured products, including exports to the rest of the UK.