‘Steady growth’ in Scots economy predicted by KPMG

KPMG has released its first ever report on the state of the Scottish Economy, predicting “slow but steady growth” over the next two years.

The report said Scottish economic momentum is set to be propelled by consumer spending “thanks to a recovery in real incomes and relatively low propensity to save, while the outlook for investment is weaker.”

Slowing population growth and a decline in North Sea oil activity are deemed to be among the key challenges to the long-term growth outlook.

The forecast shows growth of 0.4% for the Scottish economy this year, similar to the UK, with growth expected to pick up to 1% in 2025.

“The labour market has remained robust, with the unemployment rate averaging 4% over 2023,” said KPMG.

“Against this backdrop, consumer spending growth has outperformed the UK, and it is expected to accelerate to 0.4% in 2024 and 1.5% in 2025.

“Business investment has been hurt by higher interest rates, along with earlier global supply chain disruptions.”

The report expects the weaker investment momentum to persist, resulting in a 1.4% fall in business investment in 2024, with a modest return to growth next year as near-term uncertainties ease.

“Risks to these numbers include potential supply chain disruptions, particularly for the manufacturing sector, but, on the upside, looser financial conditions could see a pickup in business investment and potentially stronger productivity leading to higher economic growth,” said the report.

“Unlike the rest of the UK, the Scottish economy managed to avoid a technical recession in 2023, posting growth of 0.1% for the year.

“As a result, GDP at the end of 2023 was just 1% above its pre-Covid level, broadly matching the UK performance.

“More recent momentum – based on regional Purchasing Managers’ Surveys (PMIs) – suggests a pickup in activity at the start of 2024, with March marking the third consecutive month of private sector expansion.

“Business confidence remains in line with the UK average, consistent with cautious optimism about the year ahead …

“The labour market has remained robust, with the unemployment rate averaging 4% over 2023.

“Against this backdrop, we expect consumer spending to grow at 0.4% in 2024 and accelerate to 1.5% in 2025.”

Yael Selfin, Chief Economist at KPMG in the UK, said: “While our forecast shows weaker growth momentum compared with the pre-Covid decade, there are nonetheless some reasons for optimism.

“We expect consumer demand to remain relatively solid, while the adoption of new technologies could boost productivity growth in the medium term …

“The big question mark remains around the outlook for investment, which is forecast to fall for the first time since the Covid pandemic.

“However, with many projects currently put on hold, the question is hopefully when – and not if – businesses will resume capital expenditures.

“The expected fall in interest rates could provide a much-needed boost, although the near-term outlook for monetary policy is somewhat less clear than at the start of the year.”

James Kergon, Senior Partner at KPMG Scotland, added: “Businesses in Scotland will have to adjust to the long-term challenges facing the economy, including slowing population growth and a secular decline in the oil and gas activity.

“Those able to turn this into opportunity will stand ready to reap advantages of the energy transition, while the productivity gap with the rest of the UK offers scope for catch-up growth.”