In the first half of 2024, Scotland’s economy saw strong growth largely keeping pace with the rest of the UK, but the second half of the year is showing signs that this growth will slow.

The most recent EY ITEM Club Scottish Forecast revealed that gross value added (GVA) should expand by 0.7% over the course of 2024, slightly below the UK average of 0.9%. Scotland’s growth is expected to pick up in 2025 (1.3%) and 2026 (1.4%).

The forecast, however, is weaker than last quarter, with Scotland continuing to lag UK growth over the forecast period.

Scotland’s economic growth in the first half of this year was broad-brushed, with contributions from production sectors as well as service sectors. However, the rapid growth in largely consumer-facing sectors recorded in Q1 has not sustained in Q2, and construction has struggled.

It is anticipated that consumer spending will expand by 1.5% a year supporting GDP growth in coming years, and private services alongside the healthcare sector are set to drive longer term growth.

However, within Scotland there are glimmers of hope.

Future growth is forecast to be concentrated in and around its largest cities, Edinburgh and Glasgow (1.8% and 1.7%, respectively, between 2025-2029), with weaker prospects for the Islands and rural regions.

This is principally due to sector mix with private services expected to drive growth located in Scotland’s larger urban areas.

A range of other factors that support economic development are also key, including working age population growth, skills, physical, and IT infrastructure, and public and private sector investment. The inflow of Foreign Direct Investment (FDI) in particular is directly related to increases in labour productivity.

Aberdeen City and neighbouring Aberdeenshire are forecast to continue to struggle. 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%.

Between 2025 and 2029, the working-age population is expected to decline in 21 of Scotland’s 32 local authority areas, with decreases most pronounced in some of Scotland’s rural and island areas, including Eilean Siar (-0.9% per year), Dumfries and Galloway (-0.7%), and Argyll and Bute (-0.7%).

However, this is not just a simple mainland vs islands or rural vs urban story. Inverclyde, part of Glasgow City Region, is expected to experience one of the highest rate 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 falling working-age population.

Further, ONS data suggests the rate of Scotland’s economic inactivity remains stubbornly high at 23.7%, 0.6% up on the previous quarter, and above the UK average of 21.8%.

It is also almost 1% higher than for the same period a year before. Reducing levels of economic inactivity is key to supporting long-term growth in Scotland and, indeed, the whole UK.

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Productivity growth is expected to recover a little further, settling around 0.9%, while employment growth is set to slow to just 0.5% per year between 2025 and 2029. Both these elements are slightly weaker than the UK forecast, with sectoral and demographic factors at play.

This all plays into the backdrop as the nation awaits the Scottish Government’s spending commitments and rate of income tax.

“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 costs,” EY Scotland managing partner Ally Scott said.

“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 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.”