EY: Scotland GVA forecast edges upwards as employment headwinds remain

Longer-term prospects remain promising, with forecasts showing a slightly stronger growth trajectory for 2025 at 1.7%, compared to the previous 1.4%, with sustained growth expected in following years. However, Scotland’s economic growth is expected to lag the UK which is forecast to grow by 1.8% a year in 2025 and 2026, increasing to 1.9% in 2027.

The contraction from last quarter is largely due to the weak end to 2023 dampening expectations but, much like the UK, Scotland’s economy has not grown in two years. There is also growing evidence that labour market demand is softening including falling employment, fewer job adverts, and easing pay growth even as unemployment remains low.

According to ONS, the total number of online job adverts in Scotland in the week to 12 April 2024 decreased by 5% when compared with the previous week and is 32% below the level seen for the equivalent period of 2023.

A modest rise in unemployment to 4.2% this year is expected but forecast to return to 4.0% in 2025. As conditions improve, employment is expected to rise and growth of around 0.8% should be sustained both this year and next.

Employment growth at this level will see Scotland lagging the UK average, which is expected to grow by an average of 1.1% over the same period. A factor in this difference in employment growth prospects lies within sector profiles, with Scotland underrepresented in certain industries that are expected to see stronger employment growth in the future, such as professional, scientific & technical services and the administrative & support sector.

With politics dominating the current headlines at both a Scotland and UK level, there may be opportunities to consider revisiting the economic growth and business agenda, including migration policies that could stimulate the economy and ease labour market headwinds persistently seen in EY macroeconomic forecasts.

EY Scotland managing partner Ally Scott said: “As the Scottish business community anticipates a policy reset from new political leadership, our forecast shows the economy remains marginally behind, but largely tracks, trends we see at a UK level.

“The deterioration at the end of the year was most strongly felt in the manufacturing sector which suffered a sharp decline in Q4, and while the services sector was largely flat overall, some private service activities show signs of improvement.”

He continued: “Households and some business sectors appear to be gaining optimism about the year ahead, but recovery in household finances and spending will take time to feed through into growth. GVA growth is forecast to be weak this year but momentum is predicted to build for a brighter outlook for 2025 and beyond.

“While political distraction and instability is never welcome within the business and entrepreneurial community, Scotland currently has an opportunity to reset the sluggish trajectory of what many of our reports imply and set a functional, pro-growth business agenda that can enable and accelerate a more vibrant and sustainable economy for the longer-term.”

EY Scotland managing partner for financial services Sue Dawe said: “Scotland’s employment is expected to rise as conditions improve through the year with sustained growth both this year and next. While this is welcome news, Scotland’s employment is predicted to lag the UK average.

“Differences between Scotland and UK’s employment growth prospects, in part, relates to underrepresentation in certain sectors that are expected to see stronger employment growth in the future.”

She explained: “Our report predicts demographics will continue to play a key role in determining the scale of future jobs growth which shows why a competitive advantage is so important in attracting a highly skilled workforce.

“That’s why having a shared vision, like the Scottish financial services growth strategy, is fundamental to constructive collaboration across industry and government, and the sector looks forward to deepening that dialogue with the incoming new government.”

Total employment is forecast to grow by an average of 0.8% a year over the 2024-2027 period. Employment growth at this level will see Scotland lagging the UK average, which is expected to grow by an average of 1.1% over the same period.

Lower inflation is expected to support a steady recovery in real incomes which, in turn, should spur growth in consumer expenditure. Even allowing for the further reduction in National Insurance Contributions in the UK governments Spring Budget, fiscal policy is tightening because of past UK tax hikes and freeze in income tax thresholds, and the introduction of the advanced rate income tax bracket in Scotland.

As a result, personal disposable income is forecast to grow by 1.8% in Scotland in 2025, and 2.1% across the UK.

Sector outlook

GVA for both accommodation & food and wholesale & retail is forecast to expand in 2024, but growth is expected to be considerably stronger in 2025 as consumer confidence and spending gathers pace.

The administrative & support sector is expected to continue to build throughout the year, reaching 2.4% in 2025, with transport & storage also responding to the uptick in activity (2.7%). Generally, private services sectors are expected to come to the fore in 2025; professional, scientific, & technical services should strengthen, and the information & communications sector should return to growth after a loss of output forecast for this year.

Public sector services should continue to support Scotland’s growth this year, and GVA from public administration & defence (which accounts for 7% of total Scottish GVA) is expected to be one of the fastest growing sectors, expanding by 2%.

However, public finances are set to tighten, and this is likely to result in a small contraction in public administration GVA next year. Sustained growth is expected in health & social work as it continues to respond to post-Covid-19 demand, expanding by 1.5% in 2024 and 1.1% in 2025. Prospects for the education sector are much weaker, and GVA growth for the sector is expected to lag the economy-wide average both this year (0.3%) and next (0.2%).

The forecast for construction has been downgraded (now down 1.6%), reflecting the sector downturn at the end of 2023 and an expectation that interest rate reductions will take time to filter through to increased activity. Construction activity should rebound as the year progresses with prospects much brighter for 2025 (up 3.1%%).

Manufacturing has improved in the latest forecasts as the prospects for Scotland’s major international trading partners have become more promising. Within the manufacturing sector, the brighter international outlook favours Scotland’s exporting sectors, particularly transport equipment, chemicals, and pharmaceutical products, alongside the drinks sector.

North Sea

GVA from the mining sector is anticipated to decline in each year of the forecast period, down 6% in 2024, and down 2.3% in 2025, largely in part due to the representation of the oil & gas sector in Scotland. This decline reflects an assumption that oil & gas extraction will continue to fall as facilities in the North Sea are decommissioned. Both oil and gas export values have eased in recent quarters as prices have stabilised and volumes have continued to fall back. Output from Scotland’s mining & quarrying sector fell by almost 14% in 2023 compared to the previous year.

Mining (which includes the extraction of oil & gas), manufacturing, and construction are the only sectors forecast to reduce headcount, and in each case, this is reflective of declining output projected this year. For manufacturing, it is symptomatic of weak demand but also the ongoing long-term automation in the industry. Construction employment should pick up from 2025 onwards, but manufacturing and mining are set to decline between 2024 and 2027.

Scotland’s employment prospects improve but growth will lag the UK

Demographics continue to play a key role in determining the scale of future jobs growth. We expect population growth in Scotland to be relatively weak, with migration only just offsetting decline from natural change (births minus deaths). The result is that the population outlook for Scotland is somewhat weaker than the UK average, largely as a result of lower net migration. This impacts both the labour supply in Scotland and overall levels of demand, contributing to lower employment growth.

Even more pertinent to employment prospects is the weak growth of the working age population as Scotland’s working age population is forecast to grow relatively slowly in the short term and is even expected to decline in the longer term.

This is not a problem unique to Scotland, and most UK regions and nations will likely experience a fall in labour supply as the UK population continues to age and, if and as expected, international migration is lower in the future than it has been in the past.