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Scottish economic growth to dip to 1.2% in 2019, but ahead of 1.1% UK growth

Posted: 21st March 2019

Economic growth in Scotland is expected to dip to 1.2% in 2019, before accelerating to 1.6% in 2020, according to PwC’s latest UK Economic Outlook report.

The projections come as official figures show Scotland saw GDP growth of 0.3% in real terms during the fourth quarter of 2018, driven by growth in business services and finance. This follows growth of 0.2% in the third quarter of 2018. Compared with the same period in 2017, growth in the Scottish economy expanded by 1.3%, in line with the UK overall.

PwC predicts that in 2019 Scotland’s GVA growth will outpace the UK, which is expected to grow by 1.1% before also reaching 1.6% in 2020. Gross value added (GVA) is the sum of gross domestic product (GDP) with taxes and subsidies taken into account.

Out of 12 nations and regions analysed by PwC, only the South East of England is expected to grow at a faster rate than Scotland this year, at 1.3%. Scottish growth will match London and the South West.

Economic growth across the UK is expected to slow as a result of the drag on business investment due to ongoing uncertainty over the outcome of Brexit.

PwC main scenario projections for real output (GVA) growth by region

Region 2019 2020
South East 1.3% 1.7%
London 1.2% 1.8%
South West 1.2% 1.7%
Scotland 1.2% 1.6%
East Midlands 1.1% 1.7%
UK 1.1% 1.6%
East 1.1% 1.6%
North West 1.0% 1.6%
West Midlands 1.0% 1.4%
Wales 0.9% 1.5%
Yorkshire & the Humber 0.9% 1.5%
North East 0.8% 1.4%
Northern Ireland 0.8% 1.4%

 

Source: PwC projections for real Gross Value Added (GVA) growth for regions or real GDP growth for the UK

 

Lindsay Gardiner, PwC Scotland Regional Chairman, commented:

“While there are undoubted challenges affecting the UK, it is encouraging to see the Scottish economy among the most resilient parts of the country.

“In spite of the ongoing uncertainty over the UK’s future relationship with Europe, we are continuing to see investment in the private and public sectors, with City Deals funding across the country set to play an important role in Scotland’s near-term development.

“Scotland’s GDP grew by 1.4% compared to 2017, the same as the UK, so the outlook for the current year, in GVA terms, suggestions a slight contraction as macro-economic factors relating to Brexit come to a head, before growth accelerates to 1.6% in 2019.”

The Outlook says that consumer spending has driven the UK economy since the June 2016 referendum to leave the European Union, and this has been supported by recent increases in real income growth. Countering this is a cooling of the housing market, and further rises in household borrowing which may be hard to sustain.

John Hawksworth, chief economist at PwC, comments:

“Our main scenario for UK GDP growth in 2019 has been revised down from 1.6% to 1.1% since our last report in November, reflecting growing evidence of a negative drag on business investment as well as a less favourable global economic environment.

“Recently, there have been signs from housing and labour markets that London’s performance relative to other regions has been less strong. We expect this to continue in 2019-20, with London growing only slightly faster than the UK average rate in those years.

“Brexit-related uncertainty is likely to dampen growth in all regions in 2019, but there could be some acceleration in growth across the UK in 2020 if an orderly Brexit can be achieved. In this scenario, the Bank of England could resume very gradual interest rate rises later in 2019 or in 2020, but it is unlikely to take any action until the fog of uncertainty has cleared.”

Scotland’s economy from 1970 to 2017

The latest UK Economic Outlook looks into historical trends in the UK’s nations and regions, stretching back to the 1970s. It notes the annual average GVA growth in Scotland in the 1970s was 2.3% before falling to 1.5% in the 1980s as the country felt the impact of the slowdown in industrial output. This recovered to 2.2% in both the 1990s and 2000s, before the economic crash which began in 2008 saw a drop in the 2010s, to date, to 1.6%.

The report notes that while migration boosted population growth across the UK after 2000, the effect was less marked in Scotland.  Looking at population trends and regional GVA per capita growth over the period from 1972-2010, PwC analysis of ONS and ESCoE data shows 1.89% average annual GVA growth in Scotland against average annual population growth of 0.08%.

Based on GVA per capita growth Scotland would have been the second fastest growing part of the UK on average over the period, behind London, yet in terms of total GVA growth Scotland ranks only sixth of the 12 UK regions due to factors which have led to slower population growth over the 45 years measured. These include the end of heavy industry in the 1970s and 1980s, and an older population on average.

Consumer spending and household income prospects

Given the current strength of the labour market, PwC projects real household disposable income growth in the UK to pick up gradually in 2019 and 2020, reaching 2% in the latter year. Real wages are expected to continue to grow, but at rates below those seen before the global financial crisis as productivity growth remains relatively subdued.

The Outlook report finds consumer spending growth is expected to moderate from 1.9% in 2018 to around 1.4% in 2019, as stronger real wage growth is offset by concerns about the implications of Brexit, slower projected jobs growth, the prospect of a gradual rise in interest rates in the medium term and subdued house price growth.

Mike Jakeman, senior economist at PwC, comments:

“Consumer spending has so far been remarkably resilient to political turmoil, but it has become sufficiently acute for us to expect more cautious spending trends in the first half of this year. If an orderly withdrawal from the EU can be achieved, however, spending growth should pick up in the second half of 2019 and in 2020.”

PwC’s projections suggest that households will spend more than 30% of their budgets on housing and utilities by 2030, up from 27% in 2018. The share of spending on financial services and personal care is also likely to increase over time, while the share spent on necessities such as food and clothing will fall.

The proportion of purchases conducted online doubled for food, furnishing and clothing categories between 2010 and 2018. PwC’s projections suggest that the online share of total UK retail spending could rise between 2018 and 2030 from 5% to 8% for food, from 10% to 22% for furnishings and from 18% to 32% for clothing.

 

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