By Ian McConnell
Business Editor
SCOTLAND’S economy will grow more strongly than thought previously this year with a 6.4 per cent rise in gross domestic product underpinned by strength in the manufacturing, and oil and gas sectors, KPMG forecast yesterday.
And Scottish GDP is projected in the accountancy firm’s latest UK economic outlook report to return to its pre-pandemic level by the first quarter of next year.
However, KPMG is also warning of a jump in corporate insolvencies throughout the UK as government support measures put in place amid the coronavirus crisis come to an end.
KPMG has raised its forecast of Scottish GDP growth this year significantly from the 5.5% it had projected in March.
It said: “Scotland’s GDP will grow by 6.4% in 2021…allowing the Scottish economy to reach its pre-Covid level by the first quarter of 2022. Growth will be supported by manufacturers that benefited from increased investment during the early stages of the pandemic and by oil and gas businesses experiencing an increase in global demand and rising oil prices.”
However, while the growth projection for this year has been raised, KPMG has revised its forecast of expansion in 2022 down to 5.2% from the 5.8% it had predicted back in March. It expects 2022 growth to be underpinned by services firms.
The accountancy firm said: “Scottish financial and business services firms will be the main contributor to national GDP growth in [the] long term, with the relative lesser impact of Brexit on Scotland’s financial services sector compared to London an important factor.”
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KPMG’s Scottish growth projections for this year and 2022 are marginally behind its forecasts of expansion for the UK as a whole.
It forecasts UK GDP will grow by 6.6% this year, and by 5.4% in 2022.
The Bank of England last month raised its projection of UK expansion this year to 7.25%, from 5% in February, while cutting its forecast of 2022 growth from 7.25% to 5.75%. The Organisation for Economic Cooperation and Development forecasts the UK will grow 7.2% this year and by 5.5% in 2022.
GDP fell by 9.6% in Scotland last year, a marginally less-steep decline than that of 9.8% for the UK as a whole, official figures show.
Catherine Burnet, who chairs KPMG in Scotland, said: “Our latest analysis shows that the pace of Scotland’s economic recovery is accelerating as restrictions ease, while the performance of two of our most important sectors – manufacturing and oil and gas – drives us further forward.
“How quickly we move along the Scottish Government’s roadmap out of lockdown over summer could have an impact on our projections, but it’s still incredibly encouraging to see GDP…could return to pre-pandemic levels by the start of next year.”
KPMG projects, given spare capacity, the Bank of England will hold interest rates in the short term “in order to allow the economy to fully recover and mitigate the downside risks to the outlook”. UK base rates are at a record low of 0.1%.
However, KPMG foresees a sharp rise in insolvencies, to around double the “usual” number.
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It said: “From the onset of the pandemic, businesses have been partially shielded from insolvency both by the direct financial support on offer as well as by temporary measures suspending and relaxing insolvency procedures.
“So, once the temporary regime is over and businesses are forced to confront a new normal, there could be a significant uptick in the number of company insolvencies, despite interest rates remaining low in the short term.”
It added this could mean a quarterly peak of about 8,000 insolvencies around the turn of the year before numbers “fall back again to around 4,000 per quarter”.
On the broader UK economic front, KPMG noted “the outlook beyond the short term paints a less-strong picture, with the end of the super-deduction [capital] allowance and the rise in corporate tax causing a sharp fall in business investment from 2023, while consumers readjust their spending patterns”.
Ms Burnet said: “We cannot forget that some sectors of the Scottish economy, such as tourism, hospitality and retail, have been more acutely affected by the pandemic than others.
“The end of government support schemes may coincide with a rebound in demand for these sectors, but there is still a steep hill to climb to overcome the disruption created by Covid-19. This challenging environment, combined with factors such as rising cost pressures, could slow Scotland’s economic recovery down.”
Yael Selfin, chief economist for KPMG in the UK, said: “As restrictions are lifted and consumers flock back, we expect a robust recovery ahead. Some sectors, such as manufacturing and construction, have already recovered most of the ground lost last year, while for others such as hospitality, the big times are now. But the possible emergence of new variants of the virus that are less responsive to the current vaccines is still a downside risk, albeit less severe than previously, as the economy has adapted to operating under social distancing restrictions.”
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