EY downgrades Scotland’s growth forecast amid low productivity

EY has downgraded Scotland’s growth forecast to a GVA of 0.9% for 2025 due to low productivity and high labour market inactivity causing a slowdown in output from consumer-facing sectors in the fourth quarter. While Scotland outperformed the UK in 2024, according to EY’s latest ITEM Club Scotland report, the Big Four firm believes that this downturn was due to households becoming more cautious amid growing economic uncertainty. While GDP data suggests a “favourable” outlook, with growth in Scotland outperforming the UK last year, EY warns that the data masks the quarterly profile of growth which shows a slowdown throughout 2024 as GDP registered no growth in the fourth quarter. This downturn coincided with rising inflation, which surged from 1.7% in September to 2.5% by December, and then 3% in January. EY’s report does forecast growth to return at a GVA of 0.9% in 2025, despite the final quarter of last year’s impacts on this year’s growth prospects as “it takes time to unwind”. As a result, the report suggests that growth expectations are weaker than previously anticipated, with an expected GVA growth of just 0.9%, 1.5% in 2026 and 1.3% in 2027. Forecasts indicate that private services sectors and construction will drive “robust” GVA growth and maintain above-average growth in the following years. A critical concern is Scotland’s continued weakening labour market, as data indicated a modest decline in employment within the private sector in January. Despite ongoing job postings, employers are struggling to fill roles, leading to a gradual rise in unemployment. Ally Scott, Scotland managing partner at EY, said: “Scotland continues to grapple with low productivity and high labour market inactivity. Despite outperforming the UK last year, which is very welcome news, the pronounced slowdown at the end of last year has led to another downward revision of our growth forecast. “The shared challenge to both public and private sectors is the pressing need to address productivity, labour market and growth trends, and try to turn this into an economic opportunity.” Sue Dawe, Scotland managing partner for financial service at EY, added: “Addressing skills shortages and enhancing workforce participation will be essential in revitalising Scotland's labour market. While household incomes are expected to recover, inflationary pressures and cautious business sentiment may dampen investment and, therefore, hiring.”