A leading think tank has slashed this year's growth forecast for the Scottish economy by more than half as recent data has come in "much weaker" than expected, with large numbers of businesses delaying or cancelling investment plans.

Today's quarterly Economic Commentary from experts at the University of Strathclyde's Fraser of Allander Institute highlights "faltering and pretty muted" activity, with high inflation and elevated interest rates taking a heavy toll. While the institute's economists have left their growth forecasts unchanged for 2024 and 2025, they warn that these conditions look likely to persist for longer than previously thought, meaning there are more downside risks to the longer-range forecasts than when last presented in June.

“Growth in 2023 so far has presented a pretty mixed picture," said Mairi Spowage, director of the institute. "While much better than we were expecting at the end of 2022 – with the predictions of recession proving thankfully unfounded.

“Despite this though, it is clear that businesses are not feeling that conditions are great right now, with many delaying or cancelling investment due to the high interest rate environment and wider economic uncertainty.”

READ MORE: Recession ‘cannot be ruled out’ as business activity falls again

The report, sponsored by Big Four accountancy group Deloitte, now predicts that the Scottish economy will grow by just 0.2% this year. The institute's last Economic Commentary in June had forecast growth of 0.5% in 2023.

Thereafter, the institute is predicting growth of 0.7% in 2024 and 1.2% in 2025. Angela Mitchell, senior partner for Scotland at Deloitte, said the outlook is "thoroughly mixed" for both businesses and consumers.

"Notably, the rate at which businesses are delaying or cancelling investments is high," she said.

"This chimes with findings from our latest CFO Survey, which found [chief financial officers] are focused on reducing leverage and capital expenditure is seen as a low priority. However, the commentary encouragingly notes that there are signs that the investment hesitation is only temporary.”

READ MORE: Economy resilient in short term but growth remains fragile in 2023

The institute's latest report follows a number of UK surveys released yesterday that led economists to warn that the UK is "skirting with recession".

The preliminary reading of the S&P Global UK Purchasing Managers' Index (PMI) for the services sector fell in October to 49.2 from 49.3 in September, the lowest reading since January and below the no-change mark of 50 for the third month in a row.

A separate survey from the Confederation of British Industry (CBI) showed that factories recorded the biggest drop in new orders since the early part of 2021, as well as a sharp fall-off in cost pressures and hiring plans. Adding to the downbeat tone, delayed labour market data from the Office for National Statistics (ONS) showed falling numbers of people in employment and a small rise in the number who are unemployed.

S&P Global said the UK looks on course for a 0.1% decline in quarterly economic output, with optimism in boardrooms falling to its lowest point so far this year.

READ MORE: Scottish economy: Fraser of Allander predicts year of high prices

"This supports our view that a mild recession is underway and that the Bank of England has finished hiking interest rates," said Ruth Gregory, deputy chief UK economist at Capital Economics.

João Sousa, deputy director at the Fraser of Allander, said the economic situation will have knock-on effects as UK Chancellor Jeremy Hunt prepares to deliver his Autumn Statement on November 22. This will be followed by the Scottish Budget on December 19.

“The outlook for the public finances continues to be challenging, with slow growth translating into weak tax revenue forecasts," he said. "Despite recent positive revisions to UK growth, this is unlikely to translate into more fiscal headroom for the Chancellor.

“So, the spending envelope remains tight, which will put further pressure on the Scottish Government’s finances in the run-up to the Scottish Budget. There have been a number of spending commitments made by the Scottish Government in recent weeks that are likely to make the situation more challenging, including funding the council tax freeze.”