The Scottish economy is predicted to remain subdued, with real GVA expected to only be 0.3% higher across 2023 relative to last year – according to the latest PwC UK Economic Outlook.

Whilst the rate of growth north of the border is greater than that predicted for the West Midlands (0.2%) and in line with rates for the North East and East Midlands (both 0.3%), it lags behind the rest of the UK’s nations and regions, particularly London at 0.8% and Northern Ireland, Wales, East of England and North West, all of whom are predicted to close out the year with growth of 0.6%.

The regional growth disparities highlight growth in the services sector which has positively impacted London’s economic activity, and strong growth in the public sector experienced in Northern Ireland.

Some regions, including Scotland, are seeing slower rates of growth because of high exposure to the manufacturing sector – which has been hit by supply chain issues – as well as high energy prices and the impact of the UK’s changing trade relationship with the EU.

Table 1: UK 2023 real GVA main scenario projections, by region, 2023 

Sources: PwC analysis, ONS, IHS Markit

Jason Morris, Regional Market Leader at PwC Scotland, said:

“Whilst we look to be ending the year in Scotland on a more subdued note in terms of economic growth in comparison to other regions across the UK, the rate of economic growth has remained steady throughout the year.

“Our recent Regional Productivity Tracker highlighted Scotland’s productivity and prowess in manufacturing which has, unfortunately, suffered supply chain issues over the past couple of years. However, these have now largely recovered, and we expect activity within the sector to pick up into 2024 as a result – particularly once relatively lower energy prices start to feed through to businesses within the sector – which is encouraging.”

The contraction of sectors related to oil and gas production in 2023 are also highlighted as a factor in Scotland’s lower than average growth.

Jason Morris, Regional Market Leader at PwC Scotland, continued:

“The latest Economic Outlook, and the differing regional growth rates, serves as a reminder that there remains a need to close – or simply narrow – ongoing productivity gaps, by taking advantage of opportunities for growth and investing in businesses.

“Whilst some of the factors impacting economic growth in Scotland could potentially be attributed to a slowing in North Sea oil production, as a nation we have a central role to play in a fair energy transition. This is just one example of an opportunity for growth that we must continue to capitalise on going forward as well as our important role in energy security.”

On an annual basis the UK economy is expected to grow by around 0.5% in 2023 and 2024, and is likely to avoid recession, according to PwC’s UK Economic Outlook. This is an improvement over PwC’s April Economic Outlook prediction of 0.1% growth for 2023. However, despite this, economic activity is likely to contract in the third quarter this year. PwC’s UK economics team also expects the government to hit its target to halve inflation by the end of the year.

Inflation

Inflation is expected to end the year at around 4.6% –  higher than predicted last publication (3.5%) but comfortably below No. 10’s target of 5.4% for the fourth quarter of 2023. There will likely not be a linear decline in 2024 as current natural gas and peak futures prices are pointing to household energy prices rising in the new year, due to current geopolitical instability in the Middle East. A full return to a 2% inflation target is unlikely until 2025.

UK CPI inflation peaked at 11.1% in October last year and is down to 6.7% on the latest data. At a high level, this brings the UK closer to peers (5.6% in France and 4.3% in Germany, 3.7% in the US). Most of the recent falls in inflation have been driven almost exclusively by lower energy inflation. Services inflation is likely to drop down to around 6% by end of year, albeit only gradually as wage growth continues to remain above historic norms. Core goods inflation is expected to steadily drop as supply chains are in a better state, cost pressures are less intense and demand is slowing.

Barret Kupelian, Chief Economist at PwC UK says:

“Ever since economies have re-opened from the pandemic, inflation has been front of mind for every single business leader and policymaker. As we approach 2024, there are some encouraging signs that it is finally subsiding. By the end of this year, we expect inflation to be less than half the 11% peak recorded last year, with No. 10 meeting its target to halve inflation. However, it will remain above the Bank of England’s 2% target for next year. So there is a long way to go before we can declare ‘Mission Accomplished’ on the inflation front.

“According to our estimates, the UK economy has felt around half of the impact of the Bank of England’s policy tightening. So in the coming few months we expect to see large swathes of the economy to adapt to the impact of tighter monetary policy. For example, homeowners looking to remortgage next year are likely to see average annual repayments increase by around £3,000 per year. The more encouraging news is that it is unlikely we will see additional Bank of England base interest rate rises, assuming no unexpected shocks to the economy.

“But if recent history is any guide, the road ahead is likely to be bumpy. We are already seeing financial markets reassess upwards their views on future European natural gas prices. Even though it is too early to say, this is likely to marginally push up the household energy price cap in the UK in 2024. We are certainly in a better position now compared to the beginning of the year, but we aren’t out of the woods just yet.”

Real earnings growth flat for nearly two decades

The labour market continues to run hot, with regular pay growing by 7.8% in cash terms in the three months to August 2023. However, the story is radically different once taking a longer term view and adjusting for inflation. Specifically, by the end of the year real earnings are expected to be around the same level as in 2006. This is equivalent to no net earnings growth for 17 years, with the average worker earning around £17,000 less (in 2022 prices) than if real earnings had grown at their historic rates.