Economic growth in Scotland will remain subdued in 2019 and 2020, but slightly ahead of the UK overall this year, according to PwC’s latest UK Economic Outlook.

The report projects growth of 1.3% in Scotland this year, down 0.3 percentage points from July’s projection, but ahead of the 1.2% expected across the UK. In 2020, growth is projected to fall back to 1.0%, in line with the UK and significantly below the UK’s long-term average rate of around 2%.

Official figures published last month estimate GDP fell by 0.2% in Scotland in the second quarter of the year, largely because of a dip in construction output. The GDP Quarterly National Accounts published in October suggest year-on-year growth in the second quarter of 0.6%.

The latest Economic Outlook from PwC also reports that UK GDP could be boosted by 4% – or £83 billion – if local areas with below-average productivity levels could make up even half of the gap.

The report examines UK regional productivity, revealing wide variations in domestic productivity per job, as well as from an international perspective. PwC concludes that UK output per worker is around 10-15% behind Germany, France and Sweden and more than 30% behind the US.

In terms of economic growth, only London and the South East are expected to grow at a faster rate than Scotland this year, while next year the ongoing economic uncertainty caused by Brexit will see growth fall across all 12 nations and regions measured by PwC.

According to the UK Economic Outlook, growth has slowed over the past two years primarily due to a dampening of business investment, resulting from both a lack of clarity over Brexit as well as heightened global trade tensions.

Although consumer spending has continued to drive the UK economy, supported by recent rises in real incomes, a cooling housing market coupled with slower jobs growth means there is likely to be only moderate UK-wide consumer spending growth of around 1.2% in 2019 and 1.4% in 2020.

Stewart Wilson, Head of Government and Public Sector for PwC in Scotland, commented:

“Our latest projections indicate that Scotland’s economy should perform relatively well both this year and next, slightly ahead of the UK overall, however growth remains subdued relative to long-term trends.

“The economy is likely to remain subject to volatility given the current uncertainty in the country and across the world, however, there could be a modest uplift in business investment should the UK finally secure an orderly Brexit. Even so, uncertainty across the global economy means growth is unlikely to return to previous levels next year.”

John Hawksworth, chief economist at PwC commented:

“Any potential weakness in private sector spending in 2020 should be offset at least in part by stronger trends in government spending. Both major political parties have shifted away from austerity, which is likely to support growth in 2020, irrespective of the outcome of the forthcoming general election. But this will also leave a bigger budget deficit to deal with in the longer term.”

PwC forecasts that all 12 UK nations and regions can expect modest but positive growth in 2019 and 2020. Although in previous years London has generally had the strongest growth rate of any UK region, PwC predicts it will grow only slightly faster than the UK average in 2019-20, due partly to the greater exposure of some London activities, such as the City, to adverse effects of Brexit uncertainty.

The UK Economic Outlook says that most industry sectors can expect relatively modest growth in 2019-20, though short-term trends remain dependent on how events develop around Brexit. The distribution, hotels and restaurants sector remained strong in the first half of 2019, but a slowdown is expected next year, whereas the weakened business services and finance sector could enjoy a modest recovery in 2020 assuming an orderly Brexit can be achieved.  The manufacturing and construction sectors have experienced considerable volatility in recent years and are unlikely to see sustained recovery until there is clarity on both Brexit and the global trade outlook.

As inflation has fallen back below the Bank of England’s 2% target in recent months, real earnings have started to grow again at a relatively strong pace. While this upward trend is expected to continue into 2020, it is difficult for strong real wage growth to be sustained on a longer-term basis unless productivity also picks up.

International productivity

An Increase in regional productivity would improve the UK’s economic prosperity and its comparative performance with advanced economies, where it is currently lagging behind. The UK Economic Outlook reveals that this is not down to the UK having too small a manufacturing sector (except in part in relation to Germany); instead it reflects lower average UK productivity levels within a number of major industry sectors, such as retail and wholesale.

Alex Tuckett, senior economist at PwC commented:

“It is striking that the UK lags behind other advanced economies, with output per hour in the UK 14% lower than in France and 30% lower than in the US.

“Evidence suggests that this productivity shortfall is due to low levels of investment and R&D spending and a longer tail of companies and workers with relatively low productivity and skills. The UK has the third lowest investment rate in the entire OECD and low R&D spending – at just 1.7% of GDP it is below the EU average of 2.1%, behind France and Germany and barely half the level of Sweden.

“The economic prize would be significant if the UK were to close the per-worker gap to German levels, for example. This could see the UK economy grow £ 180bn per year larger – £5,800   for each worker in the UK.”

PwC points to a horizontal strategy as a means to improving productivity performance across a range of sectors, including higher standards in the formal education system and a lifelong upskilling strategy that enables workers to acquire new skills, particularly digital skills, as well as a better investment environment, modern infrastructure, and a financial system that supports investment by firms of all sizes.

The report shows that the issue for many parts of the UK is less about how to catch up with other countries and more about how to catch up with regions and cities closer to home. More importantly, it highlights that productivity is a crucial challenge facing the next government, with significant economic gains achievable for both regions and the country as a whole.