Scotland’s economy is set for weaker growth despite avoiding entering a technical recession, according to KPMG.
A new report published by the advisory giant’s UK arm has predicted “slow but steady” growth in the medium term but added that economic momentum is set to be “propelled” by consumer spending thanks to a recover in real incomes and relatively low propensity to save.
However, KPMG UK added that a slowing in Scotland’s population growth and a decline in North Sea oil activity are among the key challenges to its economic outlook.
The Scottish Economic Outlook report includes a forecast growth of 0.4 per cent this year, similar to the rest of the UK, but relatively weak by historical standards, with that expected to pick up to 1 per cent in 2025.
KPMG said that the risks to these numbers include potential supply chain disruptions, particularly for the manufacturing sector but the firm added that “looser financial conditions” could see a pickup in business investment and potentially stronger productivity leading to higher economic growth.
Unlike the rest of the UK, the Scottish economy managed to avoid a technical recession in 2023, posting growth of 0.1 per cent for the year.
As a result, GDP at the end of 2023 was just 1 per cent above its pre-Covid level, broadly matching the UK performance.
KPMG also said that it expects expect consumer spending to grow at 0.4 per cent in 2024 and accelerate to 1.5 per cent in 2025.
The report also cites that more recent momentum – based on regional Purchasing Managers’ Surveys (PMIs) – suggests a pickup in activity at the start of 2024, with March marking the third consecutive month of private sector expansion.
Business confidence also remains in line with the UK average, consistent with cautious optimism about the year ahead.
The labour market has remained robust, with the unemployment rate averaging 4 per cent over 2023.
‘Some reasons for optimism’ in Scotland
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.”
According to KPMG, the outlook for consumer spending in Scotland rests on three key developments:
Expected moderation in inflation supports real households’ disposable income and a recovery in purchasing power
Ongoing improvement in consumer confidence seen since the start of 2023 keeps the saving ratio low, as households feel more secure to spend
Low relative housing costs, as Scotland boasts the lowest house price-to-earnings ratio in the UK, and is the only region alongside London where affordability has improved since 2019, allowing a larger share of income to be spent on other goods and services.
Businesses in Scotland ‘will have to adjust’
The report expects the weaker investment momentum to persist, resulting in a 1.4 per cent fall in 2024, with a “modest return to growth” next year as near-term uncertainties ease.
KPMG added that business investment in Scotland has been hurt by higher interest rates, along with earlier global supply chain disruptions.
The firm also said that declining opportunities for oil and gas extraction have made investment in the UK Continental Shelf “less attractive”, which in turn directs less demand towards the onshore economy via the related supply chains.
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.”