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.”
He added: “Stimulating business investment in Scotland both in terms of physical assets and skills could deliver extensive, long-term economic benefits.
“This presents an opportunity for public and private sectors to define a new way of working together in order to drive further economic growth.
“Business investment is imperative to the long-term health and growth of the Scottish economy but is currently subdued.
“Government can help de-risk investment by supporting the development of skills and infrastructure that businesses need so that companies can feel confident they can maximise their investment.”
Labour market ‘improving’
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.