EY Item Club: Scottish economy faces 'slow growth'

Business confidence is subdued, in part due to Brexit worries

The Scottish economy, and particularly manufacturing, faces slow growth this year, even without a "no deal Brexit", according to a new economic assessment.

The EY Item Club Scotland forecasts that output will improve only slightly in the following years.

It says the rise is likely to be slower than the UK as a whole, due to the slowdown of migration into Scotland.

But it says forecast growth in output of only 1% this year would be better than the risk of a "no deal Brexit".

That would mean an "immediate, real and adverse" impact on exports, and probably on the prices and availability of imports.

It says a further fall in the value of the pound would raise inflation, as import prices rise.

On items such as food, that would squeeze household incomes, and it is anticipated there could be job losses.

It could also lead to the Bank of England raising interest rates more than borrowers have anticipated, in order to prop up the currency and limit the damage from devaluation.

The possibility that a weaker pound could make British-made goods and services more competitive is not seen as a balance to the harm done, particularly if British exports face new tariff barriers.

The report states: "Business and possibly consumer confidence would remain weak, with the former adversely affecting investment, and both damaging sales.

"The consequence would be slower productivity growth, with the danger that this locks the UK and hence Scotland, into a slow-growth trajectory over the medium to long term."

Responding to the pro-Brexit argument that the 2016 referendum did not lead to the feared fall in sterling and harm to the economy, the EY Item Club update argues that the vote did not directly change anything, whereas a shift to World Trade Organisation trading rules - the basic trade agreement used by only a few countries - would have an impact.

The main part of the EY Item club update for summer 2019 assumes that there is not a no-deal Brexit. It reflects the uncertainty of not knowing how and when Brexit will take place, and also concerns about the wider, global economy.

On that basis, its 1% growth forecast for the Scottish economy is a decline from 1.3% in 2018.

Scotland's growth has been below 1% in six of the past 10 years, and has averaged a very poor 0.7% during that time.

The forecast reckons there will be no growth in manufacturing, except for food and drink. The production sector was a stronger element in the Scottish economy last year.

Finance and insurance is expected to see a decline in output this year, in line with the UK as a whole.

Retail and wholesale businesses could see growth, but that would be with continued downward pressure on prices and margins, competition from online retailers and rising costs.

Next year is forecast to have growth in the non-oil economy of 1.3%, then 1.6% in both of the following two years. Manufacturing is seen as continuing to grow at a slower pace than the rest of the economy.

The sectors doing best will be information and communication, the professional, science and technical jobs and in business support services, say the economists. A similar pattern is seen around advanced economies, as these sectors are globally integrated.

Consumer spending is expected to slow, as borrowing is pulled back. With a tight labour market, pay is expected to rise further above price inflation.

The managing partner of EY Scotland, Ally Scott, commented on the latest forecasts: "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."