GROWTH in Scotland will slow to a snail’s pace this year as the impact of the North Sea downturn triggered by the crude price slump spreads across the wider economy, a prominent think tank has forecast.

The EY Scottish ITEM Club has slashed its forecast for growth in gross domestic product this year to 1.2 per cent from 1.8 per cent six months ago, to take account of the fact that oil prices are now expected to stay lower for longer than previously thought.

The steep fall in the oil price since 2014 has prompted oil and gas firms to slash investment and jobs inflicting pain across supply chain.

The EY Scottish ITEM Club noted increasingly clear signs that the effects are hitting firms in other sectors such as engineering and financial services, which provide goods and services for oil and gas companies.

The resulting losses have outweighed the benefit of falling fuel prices.

The club reckons growth in Scotland will rise to two per cent next year, in line with the trend rate, on the assumption that conditions in the oil and gas sector do not deteriorate further.

However it believes the pace of growth this year will be the slowest since 2012, when the country was emerging from the slump triggered by the global financial crisis.

The third successive slowdown in the annual growth rate, from 1.9 per cent last year, will leave Scotland trailing well behind the UK. The Item Club expects GDP to increase by 2.3 per cent in the UK this year.

“While undershooting UK growth is a familiar pattern for Scotland, the forecast growth gap in 2016 is much larger than has been typical in the last few years,” said Dougie Adams, senior economic advisor to the EY Scottish ITEM Club

The number of people in work has fallen in Scotland since late 2014 but increased in the UK.

Mr Adams noted that the boom in the construction sector which has been supporting growth in Scotland has peaked, as work on major projects nears completion. The financial services sector faces challenges.

Against that backdrop, the impact of the North Sea downturn leaves the Scottish economy heavily reliant on consumer spending.

While the manufacturing sector has performed in line with the UK its growth has been sluggish. As a result, the prospect of the economy rebalancing to become less reliant on consumer spending and financial services is becoming increasingly remote.

Although the Brent crude price has increased from the $27 per barrel lows reached in January to around $50 per barrel, the ITEM Club’s forecasts do not assume any recovery in the sector.

Brent crude sold for $115/bbl in June 2014.

However, Mark Harvey, EY Senior Partner for Scotland, said: “From next year the country is poised for a significant increase in GDP growth with Scotland’s cities making a considerable contribution.”

He said the investment and development opportunities generated through the government-funded City Region Deals will be key to driving the future growth of Scotland’s economy.

“Scotland is an attractive investment proposition demonstrated by the record-breaking level of inward investment projects achieved in 2015,” added Mr Harvey.

The food and drink sector has been doing well.

The ITEM Club expects better growth in Scotland’s exports in 2017, although conditions in global markets are challenging.

However, the predicted recovery assumes there are no further shocks that could rival the impact of the unexpected turmoil in oil and gas markets.

It is based on the UK voting to remain in the European Union on 23 June rather than to leave through a so-called Brexit.

The club said: “The UK could choose to leave the EU on June 23rd at which point the economic outlook would be uncertain during the period of transition.”

It noted Scotland’s GDP grew by 2.5 per cent in 2014.

Official figures showed GDP per head of the population in Scotland was 1.6 per cent below the rest of UK figure at the end of 2015. It was around 7.5 per cent above the rest of the UK in 2013.

The number of people with jobs has fallen by 1.5 per cent in Scotland since late 2014 but risen by more than two per cent in the UK.