Glasgow and Edinburgh will outperform the overall Scottish economy significantly in terms of their average annual growth rates between 2025 and 2029, a leading think-tank forecasts.
However, in its latest projections today, the EY ITEM Club predicts that Aberdeen and the surrounding area will “struggle”, highlighting a decline in oil and gas activity.
Scotland is forecast to grow at an average annual rate of 1.1% between 2025 and 2029. The average annual growth rates for Glasgow and Edinburgh over the same period are projected by the EY ITEM Club at 1.7% and 1.8%, respectively.
The think-tank declared that, between 2025 and 2029, working-age population is expected to decline in 21 of Scotland’s 32 local authority areas, with this fall “most pronounced” in some rural and island areas.
Highlighting the contrast between the prospects of Scotland’s two biggest cities and those of rural and island areas, the EY ITEM Club said: “Future growth is forecast to be concentrated in and around Edinburgh and Glasgow, with weaker prospects for the Islands and rural parts of the country.”
It declared that this is principally because of “sector mix, with private services expected to drive growth located in Scotland’s larger urban areas”.
The think-tank added: “A range of other factors that support economic development are also key, including working-age population growth, skills, physical and IT (information technology) infrastructure, and public and private sector investment.”
And it observed that “the inflow of foreign direct investment in particular is directly related to increases in labour productivity”.
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However, the EY ITEM Club, while flagging forecast declines in the working-age population in the Western Isles, Dumfries and Galloway, and Argyll and Bute, declared: “This is not just a simple mainland [versus] islands or rural [versus] urban story. Inverclyde, part of Glasgow City Region, is expected to experience one of the highest rates of working population decline of 0.75% a year between 2025 and 2029. North Lanarkshire and South Lanarkshire, similarly, form part of the City Region and are also forecast [to experience] falling working-age population.”
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The think-tank observed that “Aberdeen City and neighbouring Aberdeenshire are forecast to continue to struggle”.
It said: “Aberdeen is one of the few local authority districts in Scotland to have fewer jobs in 2023 than in 2010. During this time, it has lost nearly 18,000 jobs, equivalent to 10% of its workforce in 2010, largely due to the ongoing decline in the local oil and gas industry. During the same period, employment in Aberdeenshire expanded by 7%, only slightly below the Scottish average of 8%.”
The EY ITEM Club projects that Scotland’s economy will expand by 0.7% over 2024 as a whole, slightly below the UK average growth rate of 0.9%, on a gross value added basis.
Scotland’s growth is expected to pick up in 2025, to 1.3%, and in 2026, to 1.4%.
However, the EY ITEM Club’s latest forecast is weaker than its projection a quarter ago.
And the think-tank sees “Scotland continuing to lag UK growth over the forecast period”.
EY Scotland managing partner Ally Scott flagged the potential effects of the hike in employers’ national insurance announced by the Labour Government in its October 30 Budget and aimed at boosting UK tax revenues by £25 billion a year.
Mr Scott said: “Our forecast shows economic growth is fragile and highly sensitive and we’re already aware organisations have found themselves in a bit of a quandary since the UK Government Budget on policy changes like increased employer NIC (national insurance contribution) costs.”
He added: “This poses a number of challenges. Pass through these costs fully, there’s a risk of fuelling higher inflation, which impacts confidence levels and could keep interest rates higher for longer - generally not seen as good for attracting investment. Apply the lever of lower wage rises and you hit the pockets of employees already feeling the strain on bottom-line pay from the differentiated Scottish rate of income tax, which could have knock-on impacts to key lifestyle choices in the future, such as access to mortgages.
“Take it on the chin, change nothing and accept a lower profits environment then there’s less cash for investment, reinvestment, transformation and innovation, impacting business competitiveness. A conundrum, to say the least, and a set of circumstances many clients and business leaders are struggling with. While our forecast doesn’t have these answers, ahead of the Scottish Government’s Budget it does amplify the need for policies that encourage a pro-business platform that helps restore economic growth.”
EY Scotland managing partner for financial services Sue Dawe said: “While our 2024 forecast now looks to be weaker than last quarter, we continue to expect low inflation, continued recovery of household budgets and rising consumer spending to support growth.
“However, growth prospects vary greatly across local authority areas, partly due to sectoral differences but also down to factors such as infrastructure, inward investment and demographics.”
She added: “Population growth remains a key concern for Scotland’s longer-term progress - particularly our working-age population.”
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