EY report: Scottish economy 'stuck in slow lane'

Scotland's economy is showing signs of slowing faster than the rest of the UK as consumer spending fades and firms remain reluctant to invest, according to a report.

The EY Scottish Item Club has predicted "below-par" GDP growth of 0.9% in 2017 - half of that expected for the UK.

It suggested the retail sector would be worst hit by "mounting pressure" on consumers.

Employment in Scotland is also forecast to continue to fall this year.

In 2017, it is expected to drop by 0.1%, followed by further decreases of 0.5% and 0.3% in 2018 and 2019 respectively.

However, manufacturing output is predicted to grow in line with the overall economy for the first time since 2013, as weaker sterling and a pick-up in global demand "ultimately provide a boost to exports".

The item club said Scottish households were "likely to endure a fall in real incomes" this year as a result in part of rising inflation and "weak" labour market conditions.

It expects consumer spending to rise by just 1% in 2017, and by less than 1% per year between 2018 and 2020.

This compares with an average annual rate of 2.3% over the past five years.

The forecaster said this reflected "a significant loss of momentum from a key driver of the Scottish economy".

It expects Scottish growth to slow a little in 2018 to 0.7% before gradually accelerating to around 1.4% by the end of the decade.

However, it predicts that throughout this period, the Scottish economy will grow more slowly than the UK.

Dougie Adams, senior economic advisor to the EY Scottish Item Club, described the Scottish economy as being "stuck in the slow lane".

He said: "As flagged in previous EY Scottish Item Club reports, one factor is the ending of the outsized contribution to GDP growth from construction as many of the big-ticket public sector-funded infrastructure projects near completion."

He added: "Consumer spending, which last year proved surprisingly resilient and helped buoy the economy, is fading.

"A weak labour market and rising inflation is putting further pressure on incomes and recent research reveals that households expect worsening economic conditions.

"All of this means consumers are likely to be more cautious."

EY's chief economist for UK and Ireland, Mark Gregory, said: "Scotland's economy is showing signs of slowing faster than the rest of the UK which sends a clear message that business and government will have to work harder and smarter to achieve sustained growth.

"The economy has to rebalance and shift away from a reliance on public-funded major infrastructure projects.

"Sector diversification is also required to help move away from an over-reliance on the oil and gas, construction and financial services sectors."

Responding to the report, Scottish Economy Secretary Keith Brown said: "Despite serious challenges such as the slowdown in the oil and gas sector, the foundations of Scotland's economy are strong.

"Unemployment is falling and we are seeing early signs that the situation is improving for North Sea operators.

"This report from E&Y builds on the Scottish Engineering quarterly review figures released earlier this month by showing positive signs for the manufacturing sector in Scotland.

"This report also comes after the 2017 EY Scotland Attractiveness Survey confirmed 2016 was a record-breaking year for foreign direct investment into Scotland.

"For the second year in a row we have attracted more projects than ever before and Scotland has been the top UK region outside London in every one of the past five years."

Scottish Conservative economy spokesman Dean Lockhart said: "This is another damning report that shows just how much harm has been caused by the SNP's handling of our economy.

"While the rest of the UK economy grows we are on the verge of a recession, and these figures confirm that we are stuck in the 'slow lane'.

"With the SNP focused on independence they've neglected jobs, businesses and Scotland's economy.

"It's time they took the threat of a second referendum off the table and started concentrating on turning our ailing economy around as soon as possible."

Meanwhile, a separate report has suggested improving labour market conditions in Scotland.

The latest IHS Market Report on Jobs for Scotland found that last month there were sharp rises in worker placements, record growth in permanent staff demand and falling availability.

In terms of staff demand, the data signalled the fastest rate of expansion in the survey's 14-year history, with growth faster in Scotland than across the UK as a whole.

Scottish recruitment consultancies also recorded further steep growth in demand for temporary staff.

Sector data indicated that staff demand rose fastest in the IT and Computing sector for both permanent and temporary roles.

Meanwhile, the rate of expansion in permanent staff placements in Scotland reached its highest in 27 months as growth matched the UK as a whole, which was at a 25-month high.