2016 set to be poorest year for economic growth since 2012, says EY Scottish ITEM Club
- Fallout from the oil price slump is spreading through the Scottish economy
- Employment in Scotland falls while the UK sees increases
- Construction sector beginning to plateau after rapid growth
- Economy expected to fare better from 2017
While still expanding, Scotland’s GDP growth for 2016 has been downgraded to 1.2 per cent representing a 0.6 per cent decrease from the prediction EY Scottish ITEM Club 2016 Forecast released six months ago.
Contributing factors to this 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.
Dougie Adams, senior economic advisor 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 per cent expected from next year.
“In December, EY Scottish ITEM Club reported an unsustainable, overdependence on the construction sector in Scotland for growth. This expansion is now easing, from a staggering 20 per cent in 2014 to 11 per cent in 2015, eroding the sector’s contribution of overall GDP growth.”
Substantial gap between Scotland and the UK
The latest data reveals that Scotland is underperforming the rest of the UK by a greater margin than has been typical in recent years; but while still underperforming UK growth the gap should be smaller next year.
The drop in the value of oil production means that there has been a sharp decline in oil-inclusive Scottish GDP per capita relative to the rest of the UK. At the end of 2015, it was 1.6 per cent lower in Scotland than the rest of the UK, compared with 2013 when Scotland led the UK by 7.5 per cent.
Employment trends are also diverging with the number of people in Scotland with jobs falling by 1.5 per cent since late 2014. In the UK the comparative figure has increased by more than 2 per cent.
Dougie said: “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. Forecast Scottish non-oil growth is only expected to reach 0.9 per cent during 2016, 1.1 percentage points below the expected UK growth rate. This stems from a combination of continuing oil-related impacts, the topping out of the construction boom and weaknesses in parts of business services.”
Manufacturing growth and attractiveness
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 per cent, growth in this sector still falls behind overall non-oil GDP. All manufacturing sectors mange to eke out some growth except the globally-challenged metals and machinery sector which is expected to experience a decline of 1 per cent in output this year. At the other end of the scale, food and drink remains the sector within manufacturing delivering the best growth, with output anticipated to expand by 1.2 per cent this year following on from 4.4 per cent growth in 2015.
Mark Harvey, 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 two per cent in the second half of the year.
Dougie 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.”
Consumers provide a bright spot
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.
The pace of consumer spending growth is then expected to moderate in line with slowing advances in disposable income. The forecast predicts consumers’ expenditure growth of 1.6 per cent and 1.2 per cent in 2017 and 2018 respectively.
Dougie said: “Strength in consumer expenditure should have the knock-on effect of robust growth in the retailing, wholesaling, accommodation and food sectors in 2016, supported by both domestic and tourist spend. Although this buoyant outcome will ease from 2017, in line with consumer spending, growth in these sectors is predicted to stay ahead of GDP.”
Future growth
Mark 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.”