Recession looms for Scotland, Fraser of Allander Institute forecasts

Scotland’s economy is poised to enter recession, with output contracting in the final two quarters of this year and the opening three months of 2023, the Fraser of Allander Institute forecasts.

The Bank of England has signalled a view that the UK economy is already in recession, with contraction in the second quarter and a further decline in gross domestic product expected for the three months to September.

Technical recession is defined as two consecutive quarters of contraction.

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Mairi Spowage, director of the University of Strathclyde’s Fraser of Allander Institute, noted its latest Deloitte-sponsored commentary published today “points to weakening demand in the economy as inflationary pressures pervade every aspect of our lives”.

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Fraser of Allander is forecasting Scottish growth of 3.6% for 2022, followed by contraction of 0.6% next year. The think-tank predicts the economy will then return to growth in 2024, with expansion of 0.8%.

It noted this was a “significant revision down” from its previous set of forecasts in June.

Ms Spowage said: “Consumer confidence is starting to weaken with attitudes on the outlook looking pessimistic. This has led us to reduce our forecasts for 2023 and 2024. Our assumption is that there will likely be contractions in the economy during the second half of 2022 and into 2023 given wider economic conditions. In practice, this means Scotland is likely to enter a recession.”

Fraser of Allander said the UK Government’s announcements on tax in Chancellor Kwasi Kwarteng’s September 23 “fiscal event” mean “there are resources available to the Scottish Government to either follow suit – or to invest the additional funding in services”.

Deputy director David Eiser said: “The UK Government’s ‘mini-Budget’ was anything but mini – the measures announced were very significant.

“The scale of fiscal changes – without any analysis of the sustainability of such measures - has created significant concern in the financial markets.

“The real surprises were on income tax, with significant changes announced for next financial year – albeit some subsequently reversed. Of course, these changes do not apply in Scotland, so it will be up to the Scottish Government to set out its proposed income tax policy for 2023/24 in due course.

“John Swinney has committed to producing an emergency Budget in late October – although we should probably expect that the decision on income tax will not be set out until the Scottish draft Budget is published.”

Angela Mitchell, senior partner for Deloitte in Scotland, said: “There is no doubt that businesses in Scotland face significant challenges over the next few years. Many business leaders have never navigated their business, and its people, through a period of such high inflation and weakening economic activity.

“Charities and public bodies, unable to pass on costs or pivot plans like businesses, are also facing immense pressure. The dual blows of the pandemic and cost-of-living crisis are having a profound impact on the public sector’s spend power, while simultaneously driving huge demand for public services.”