By Daniel Hunter

A strong end to 2012 coupled with an improving global picture has led the Ernst & Young Scottish ITEM Club to upwardly adjust its 2013 growth forecast, albeit it by 0.1 percentage points.

The forecasting group’s latest summer update, published today, predicts economic expansion of 0.8% this year, up from the 0.7% initially forecast in December. Further growth of 1.4% is predicted for 2014 and a return to pre-crisis growth figures of around 2% in 2015/16.

The Scotland figure for this year is slightly behind the ITEM Club’s current expectation for the UK as a whole.

Dougie Adams, senior economic adviser to the Ernst & Young Scottish ITEM Club, said: “The recovery of global trade and a gradual increase in business confidence points to a better year, but it’s fair to say that the Scottish and UK economies have been stuck in the slow lane since the financial crisis. There has been a failure to return to what was once taken for granted as normal growth.”

The growth gap between Scotland and the UK is attributed to the former’s smaller stake in faster-growing sectors and, correspondingly, its larger share of sectors where declining outputs are expected.

The three sectors with the fastest forecast growth — professional and administrative services, retail and wholesale, and transport, storage and communication — account for less than 28% of Scotland’s economy, but more than 33% of the UK’s.

Those sectors witnessing the biggest decrease in output — mining and quarrying, construction and accommodation, and food services — form 14% of Scotland’s economy compared with 12% of the UK’s.

According to Adams, the good news from a Scottish perspective is that the pace of growth at an industry level only underperforms the UK equivalent in two of the big sectors — retail and wholesale and transport, storage and communication: “In other words, Scotland’s businesses are, on average, performing at least as well as their UK peers,” he said.

Scotland has a good story to tell in terms of investment spending, accounting for 9.2% of capital expenditure in the UK since 2008, up from an average of 7.6% in the ten years prior to the onset of the financial crisis. This is above Scotland’s GDP share and a foundation for future productivity growth.

The country’s share of UK non-oil exports has also increased from just over 5% to more than 6%, but this remains well below the share achieved prior to the electronics bust that occurred early in the last decade. Drink exports now account for 28% of Scottish exports, a 10 percentage point increase on its position ten years ago.

Jim Bishop, Ernst & Young’s Scotland senior partner, said: “Investment in capital projects has supported Scotland’s economy to an extent, but attention must also be placed on expanding the country’s export base. When you consider that exports in traditional areas such as engineering are down, there is danger in Scotland’s non-oil export performance becoming heavily exposed to the continued success of one industry that relies heavily on an appetite for high-end consumer products in the emerging economies.”

The slow growth of Scotland’s economy is likely to result in small gains in average employment levels, with momentum in the labour market predicted to pick up towards 2015. On this basis, the report states that Scotland will have to wait until the end of the decade for employment levels to mirror pre-crisis levels.

Further job losses are expected in the public sector, manufacturing and other primary industries, with professional, scientific and technical services identified as potential employment growth areas.

However, the entire forecast is dependent on the assumption that the eurozone remains intact, with growth in the US sustained and world trade growth accelerating. In addition forecasts for the future of the Scottish economy face uncertainties thrown up by Scotland’s slower recovery of employment since 2008 and the potential impacts of next year’s referendum.

Dougie Adams concluded: “The hope is that the recovery will really take hold as we move into 2014, but it can’t be taken for granted. Forecasts on exports and investment remain hostage to developments in Europe, where the spectre of widespread defaults still loom. Domestically, it still remains to be seen whether a ‘wait-and-see’ attitude will develop towards Scotland while the country’s constitutional future is decided.”

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