Fraser of Allander: Scottish growth slower than expected this year

The Scottish economy is expected to grow at a slower rate this year than originally forecast due to persistent inflationary pressures.

In their latest quarterly Economic Commentary report, economists at the University of Strathclyde’s Fraser of Allander Institute are forecasting growth of 0.2 per cent for the current year, 0.7 per cent for 2024 and 1.2 per cent in 2025.

The 2023 figure is revised down from the 0.5 per cent being predicted in June, with the report – which is sponsored by Deloitte – noting that year-to-date data has been much weaker than expected.

This is in part due to the high inflationary and interest rate environment looking likely to persist for longer than previously thought. Though economists had thought inflation would come down to around 5 per cent by the end of this year, it remained steady at 6.7 per cent in September.

Fraser of Allander director Professor Mairi Spowage said: “Growth in 2023 so far has presented a pretty mixed picture. While much better than we were expecting at the end of 2022 – with the predictions of recession proving thankfully unfounded.

“Despite this though, it is clear that businesses are not feeling that conditions are great right now, with many delaying or cancelling investment due to the high interest rate environment and wider economic uncertainty.”

Angela Mitchell, senior partner for Scotland at Deloitte, said: “This quarter’s commentary shows a thoroughly mixed outlook for our economy and, accordingly, for business and consumers. Notably, the rate at which businesses are delaying or cancelling investments is high.

“This chimes with findings from our latest CFO [chief financial officer] Survey, which found CFOs are focused on reducing leverage and capital expenditure is seen as a low priority. However, the commentary encouragingly notes that there are signs that the investment hesitation is only temporary.”

The report also looks ahead to the UK Government’s Autumn Statement, which will be presented by Chancellor Jeremy Hunt on 22 November and will lay the ground for the Scottish Government’s own spending plans, which will be unveiled by finance secretary Shona Robison on 19 December.

“The commentary raises the critical need for meaningful engagement and co-production between industry and government in enacting the kind of systemic change that is needed for vital sectors of our economy to flourish,” Mitchell said.

“Ahead of the UK Government’s Autumn Statement, which will be followed closely by the Scottish Budget, that meaningful dialogue is vital to ensure the most urgent needs of our people and businesses are being met.”

Robison has already made it clear that the government faces difficult financial decisions, with the Medium-Term Financial Strategy she presented in May highlighting that there will be a £2bn shortfall in Scottish public finances by 2027-28. Since then, First Minister Humza Yousaf has announced a council tax freeze that will put even greater pressure on public finances.

Speaking to Holyrood earlier this year, Auditor General for Scotland Stephen Boyle said wide-reaching public sector reform is urgently required to ensure the funding gap can be dealt with.

“This is hard,” he said. “The system exists and it functions. Public services are delivered across 200-odd public bodies and the third-sector provides a huge number of public services through funding arrangements – there’s some private sector too.

“The case for change and the conditions to make those changes need to be absolutely clear. I genuinely believe that the people working in the public sector want to get the best outcomes for the people of Scotland, but making that change is difficult.”

Fraser of Allander deputy director João Sousa said that, with the Scottish Budget looming, the outlook for the public finances “continues to be challenging, with slow growth translating into weak tax revenue forecasts”.

“Despite recent positive revisions to UK growth, this is unlikely to translate into more fiscal headroom for the chancellor,” he said.

“So, the spending envelope remains tight, which will put further pressure on the Scottish Government’s finances in the run-up to the Scottish Budget.

“There have been a number of spending commitments made by the Scottish Government in recent weeks that are likely to make the situation more challenging, including funding the council tax freeze.”