Growth in Scotland will lag further behind the UK in coming years as the downturn in the North Sea oil and gas industry takes a heavy toll on the country, economists have predicted.
The Ernst & Young Scottish ITEM Club has warned that growth in the Scottish economy will slow sharply this year as the effects of the slump in the crude price ripple across the country.
With firms in the North Sea slashing spending and jobs the downturn has left many Scottish businesses in areas like engineering and business services facing a big drop in oil and gas work.
“The downside of the oil price fall is much more marked for Scotland than for the rest of the UK,” said Dougie Adams, senior economic advisor to the EY Scottish ITEM Club.
Scotland is facing other headwinds in the form of slower population growth and a greater reliance on the shrinking public sector than the UK and the impact of the downturn in the North Sea could be felt for years.
“The pattern of … growth in Scotland trailing the UK is expected to persist over the next few years,” said Mr Adams.
The ITEM Club predicts that the Scottish economy will still grow fast enough to result in thousands of jobs being created, leaving the employment rate at high levels.
However, it reckons the pace of job creation will slow. The public sector and manufacturers will shed jobs, while the financial services industry treads water in employment terms.
Experts at EY, the accountancy giant which sponsors the ITEM Club, noted uncertainties about important factors that could have a big impact on Scotland. These include future oil price movements and possible constitutional change.
“A hardening in the oil price … would be a positive for those parts of the Scottish economy suffering from the collapse in price over the last six months; a renewed bout of weakness would add to the pain that is already evident,” said Mark Harvey, head of EY in Scotland.
The Fraser of Allander Institute at Strathclyde University has forecast that the benefits Scotland enjoys as a result of the sharp fall in oil prices, such as lower petrol prices, will outweigh the effects of the damage caused in the North Sea.
The latest PMI survey for Bank of Scotland found the growth rate in Scotland’s private sector economy increased to a five month high in May, driven by the services sector, but trailed the UK. Manufacturing output fell for a second month running with firms citing General Election uncertainty and weak export markets as challenges.
The ITEM Club’s Mr Adams said while bad effects of the oil price fall resulting from cuts in spending by firm will feed though quickly any positive impact on consumer spending will be slower acting.
Mr Harvey added: “While there is no evidence of the impact, if any, of constitutional change on Scotland’s growth rate and other key areas including inward investment, it will be in the interest of businesses and consumer confidence to seek as much certainty and clarification as possible at this important juncture.”
EY noted risks associated with the prospect of the referendum on the UK’s membership of the EU that the Conservative Government has said will be held.
The ITEM Club forecasts that growth in output in Scotland will slow to 2.2 per cent this year from 2.6 per cent last year, based on the club’s interpretation of official data.
Growth in Scotland was boosted in 2014 by what the club described as a blistering but unsustainable rate of expansion in the construction sector, following the long downturn triggered by the financial crisis of 2008.
With growth of 2.3 per cent and 2.1 per cent forecast for 2016 and 2017 respectively the ITEM Club expects the Scottish economy will continue to expand at above the 2 per cent trend rate in each year.
The gap between the growth rate in Scotland and the UK will widen to 0.6 percentage points this year and to 0.7 points in 2016, from 0.2 points in 2014. It will be 0.6 points in 2017.
The club predicts the UK growth rate will hold steady at 2.8 per cent in 2015, rise to 3 per cent in 2016 then fall to 2.7 per cent.
It expects growth in Scotland will be driven by the private services sector.
The business services sector, which includes accountants and lawyers, is set to lead the way in creating jobs.
The headline Bank of Scotland PMI reading rose to 51.9 from 50.7 in April, where 50 separates expansion from contraction.
The UK reading fell to 55.8 from 58.4.
Source: Herald Scotland