ECONOMIC growth in Scotland is forecast to slow in 2019 as Brexit uncertainty weighs heavily on business investment and exacerbates the country’s acute labour market challenges.

The Scottish economy will expand by just one per cent in GVA (gross value added) terms next year, down from the expected 1.6% for 2018, according to forecasts in the latest EY Scottish ITEM Club 2019, published today.

And the contraction of growth in Scotland will come as the expansion of the UK economy picks up pace to 1.5%, reversing the trend seen this year of the Scottish economy outperforming the UK as a whole. The UK economy is expected to grow by 1.3% this year.

The EY forecasts come amid heightened political uncertainty around Brexit and its ramifications for households and businesses, with clarity on the UK’s future relationship with the EU remaining elusive.

While the recovery of the oil and gas sector has helped Scotland grow faster than the UK this year, EY said Scottish growth will be hampered next year as Brexit uncertainty curbs business investment. Expansion will also be constrained by sluggish growth in employment and disposable income.

EY chief economist Mark Gregory said Brexit will exacerbate the challenges presented to the Scottish economy by a “delicate labour market”, characterised by an increasing working age population and falling working-age migration. EY said the working age population is expected to fall by an average 0.4% per year over the next five years. And it highlights “lacklustre” employment growth of 0.3% in 2019 and averaging 0.3% per year between 2018 and 2023 – below 0.5% for the UK.

At the same time, EY warns that while consumer spending will contribute significantly to economic growth in Scotland in 2019, it will be fuelled by people running down savings rather than growth in wages. It forecasts growth of 0.9% in personal disposable income and 1% in consumer spending.

Scotland has a greater dependency on migration than other parts of the UK, which could bring acute problems if Brexit effectively ends the free movement of EU citizens to the UK for work.

Mr Gregory said: “Scotland is a bit limited in its ability to grow by its demographics. The workforce isn’t expanding so the consumer base isn’t expanding. Consumers have been borrowing to fund their spending, so there is a limit to how far you can push that.”

Mr Gregory, who believes the odds are now heavily against a no-deal Brexit, added: “Its (Scotland’s) population is pretty fixed. It needs migration for demographic and skills reasons.”

The economist underlined the risk Brexit poses to foreign direct investment into Scotland. Noting that Scottish universities have been among the best in the UK in attracting overseas investment thanks to research in areas such as life sciences and biotech, he warned: “If you suddenly can’t get access to the best research talent or EU funding, you could see that as being a looming problem as well.”

Beyond Brexit, Mr Gregory noted the effects on Scottish manufacturing exports of the US-China trade war and rising US interest rates, which are having an effect on global markets.

Asked what he believes would be the best outcome for the Scottish economy from the Brexit process, Mr Gregory replied: “Scotland is quite an international economy… Clearly, economies can adjust over a period of time, but anything that really changes the current access to markets that Scotland has is going to be very disruptive. Ten, 20 years out, who knows, things may have changed, but short term it looks as though things will be a real challenge.”

The EY economist said there is evidence that productivity has been improving in Scotland, which he put down to businesses adapting to trading conditions and improving their efficiency. However he said that “the drivers of that are skills and investment.”

Asked what the Scottish Government could so in to improve skills in Scotland next week’s Budget, he said incentives for business to invest in training would be welcome.

That could include retraining schemes for those who have lost their jobs in the retail sector.