Scotland set for economic recovery but several risks remain - KPMG study

“The big question mark remains around the outlook for investment, which is forecast to fall for the first time since the pandemic.”

Scotland can expect a gradual economic recovery and steady growth over the medium term, a new study today predicts.

Economic momentum is set to be underpinned by consumer spending, thanks to a recovery in people’s real incomes and “relatively low propensity to save”, though the outlook for investment is weaker. Slowing population growth and a decline in North Sea oil activity are among the key challenges to the long-term growth outlook flagged in accountancy giant KPMG’s first ever Scottish Economic Outlook report.

It is forecasting growth of 0.4 per cent for the Scottish economy this year, similar to the rest of the UK, but relatively weak by historical standards, with that rate expected to pick up to 1 per cent in 2025. Risks to those numbers include potential supply chain disruptions, particularly for the manufacturing sector, but, on the upside, looser financial conditions could see a pickup in business investment and potentially stronger productivity leading to higher economic growth.

A decline in North Sea oil activity is among the key challenges to the long-term growth outlook flagged in KPMG’s first ever Scottish Economic Outlook report.

Unlike the UK as a whole, the Scottish economy managed to avoid a technical recession in 2023, posting modest growth of 0.1 per cent for the year. As a result, GDP at the end of 2023 was 1 per cent above its pre-Covid level, broadly matching the UK performance. A recession is defined by at least two quarters in a row where the economy contracts.

Yael Selfin, chief economist at KPMG in the UK, said: “While our forecast shows weaker growth momentum compared with the pre-Covid decade, there are nonetheless some reasons for optimism. We expect consumer demand to remain relatively solid, while the adoption of new technologies could boost productivity growth in the medium term.

“The big question mark remains around the outlook for investment, which is forecast to fall for the first time since the Covid pandemic. However, with many projects currently put on hold, the question is hopefully when - and not if - businesses will resume capital expenditures. The expected fall in interest rates could provide a much-needed boost, although the near-term outlook for monetary policy is somewhat less clear than at the start of the year.”

James Kergon, senior partner at KPMG Scotland, added: “Businesses in Scotland will have to adjust to the long-term challenges facing the economy, including slowing population growth and a secular decline in the oil and gas activity. Those able to turn this into opportunity will stand ready to reap advantages of the energy transition, while the productivity gap with the rest of the UK offers scope for catch-up growth.”

The latest Scottish Government GDP data threw up some differences between the Scottish and UK economies.

The report comes a day after it emerged that Scotland’s economy is likely to have shrunk by 0.3 per cent in February, in contrast to UK growth of 0.1 per cent in the same month. The Scottish Government estimates showed that gross domestic product (GDP) - a measure of total economic output - fell back in the second month of 2024, having seen growth of 0.6 per cent in January. Recent figures from the Office for National Statistics (ONS) revealed that UK GDP grew by 0.1 per cent in February.

Monthly figures can be volatile and for the three months to February, GDP in Scotland is estimated to have grown by 0.4 per cent, when compared with the previous three-month period.

In its report, the Scottish Government noted: “Although monthly GDP has fluctuated recently, the trend in underlying quarterly GDP has been broadly flat since the end of 2021.”

The latest figures confirmed that GDP only grew by 0.1 per cent over the course of 2023, with this revised down from an initial estimate which said the economy had grown by 0.2 per cent. The GDP data for the final three months of 2023 has been revised, with the economy now said to have fallen by 0.5 per cent over this period - compared with a previous estimate pointing to a 0.6 per cent contraction.

Alister Jack, the UK government’s Secretary of State for Scotland, said: “Long-term sustainable growth remains our goal, and with inflation expected to fall to our 2 per cent target soon, we’re on track to achieve that. We must stick to our plan. Just this week, 2.4 million Scottish workers saw the benefit of the second 2p National Insurance cut, meaning a saving of £833 a year for the average worker. That’s on top of the biggest ever increase to the national living wage.

“The UK government is now investing more than £3 billion directly into communities across the whole of Scotland, boosting trade and encouraging opportunity throughout the UK.”

Scottish Wellbeing Economy Secretary Mairi McAllan said the latest GDP figures showed the “challenging global economic conditions we continue to face” but stressed that the “overall outlook is of strengthening growth in Scotland’s economy”.

She said: “The three months to February saw growth of 0.4 per cent. Looking ahead, the Scottish Fiscal Commission forecast economic growth to strengthen moderately across 2024 and 2025. The latest indicators provide an encouraging start to the year with more new businesses, stronger business activity and ongoing resilience in the labour market.”

She added: “The Scottish Government is investing over £5bn through its 2024-25 budget to drive an economy that is fair, green and growing.”

April’s ONS figures showed that UK GDP was estimated to have risen by 0.1 per cent in February. At the same time, the previous estimate for January of 0.2 per cent growth was revised up to 0.3 per cent. The UK economy appears to be putting the 2023 recession behind it in the new year.