Allander: Scots economy to contract after Q4 growth

Scotland’s economy will contract throughout most of 2023, according to the Fraser of Allander Institute’s latest quarterly economic commentary, which includes an assessment of all key data on the UK and Scottish economies.

In the Deloitte-sponsored commentary, the University of Strathclyde researchers have set out their new forecasts for the Scottish economy.

The economists are forecasting a contraction of -1.0% in 2023, before returning to annual growth in 2024 of 0.6%.

This is a slight revision down from the Institute’s previous set of forecasts in October, reflecting the challenging period to come in the spring for consumers and businesses as government support for energy bills is rolled back.

The Institute assumes that the final quarter of 2022 shows slight growth after a dip in Q3 2022, followed by three-quarters of contraction in 2023.

Growth then returns in the final quarter of 2023, bringing an end to a three-quarter-long recession.

Professor Mairi Spowage, Director of the Institute, said: “High inflation is continuing to impact the outlook for the economy, and we still expect that there is likely to be contraction in growth during the first three quarters of 2023. This means that the economy will be smaller at the end of 2023 than at the start of the year.

“More positively, we agree with many other forecasters that there is likely to be growth in the economy towards the end of the year as inflation comes down.

“However, we need to remember that this only means that prices stop rising quite as quickly: it does not mean that prices will start to fall. Things are likely to remain difficult for households throughout 2023.

“The outlook, though, is exceedingly uncertain, and there are a number of risks to the forecasts – many of which are to the downside.”

Douglas Farish, Office Senior Partner for Deloitte in Edinburgh, said: “This quarter’s commentary captures the sense of uncertainty that persists as we enter 2023. Though the UK’s economy showed unexpected resilience in the closing months of 2022, we know there are yet more challenges ahead.

“While company leaders will naturally prioritise cutting costs and accumulating cash as the economy contracts, it’s vital that they think beyond this recession and ensure they position themselves for growth as recovery begins later this year.

“While many will continue to struggle with hiring, upskilling the existing workforce will be key. Businesses must also consider how they can cut their energy consumption, especially as the Energy Bill Relief Scheme is to be replaced in the coming months, if they are to truly futureproof their operations into 2024 and beyond.”

In the Commentary, the Institute also reflects on the announcements in the Scottish Government Budget for 2023-24, which has gone through Stage 1 & 2 in parliament over the last week.

The analysis covers some of the key headlines of the Budget, including key changes and pledges on tax and social security. In addition, the Institute discusses some of the unanswered questions from the Budget stages and subsequent Ministerial statements.

Emma Congreve, Deputy Director of the Institute, said: “Income tax changes announced in the Budget on 15th December grabbed the headlines, but there were many significant decisions made by John Swinney which underlined the priorities of the Government – protecting social security and health while many other areas are facing real terms cuts.

“But there were also many unanswered questions. We are still none the wiser on what the Government plans to spend on the National Care Service; and none of the promised detail on the approach to Public Service Reform or the public sector workforce.

“There are also, as ever, things for the Government to do to improve the transparency of the figures presented in the Budget.”