Scotland will avoid recession, according to the latest forecasts from the EY ITEM Club published today.

The think-tank forecasts Scottish economic output will grow by 0.3% in 2024 on the gross value added (GVA) measure, before expansion accelerates to 1.3% in 2025 and 1.5% the following year.

It expects “no significant rise” in unemployment, and forecasts that the economies of Edinburgh and Glasgow will outperform Scotland as a whole.

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The EY ITEM Club says: “A resilient labour market suggests no significant rise in unemployment is likely, but employment will remain broadly flat in 2024 before increasing in 2025 and 2026 as the pick-up in growth feeds through to jobs.”

However, it adds: “Sentiment among Scottish businesses and households appears to be fragile and sensitive to a backdrop of persistent high interest rates and above-target inflation, despite the recent ONS announcement.”

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Data from the Office for National Statistics last week showed annual UK consumer prices index inflation, which peaked at a 41-year high of 11.1% in October last year, had fallen from 6.7% in September to 4.6% last month.

Mulling the outlook for Edinburgh and Glasgow, the EY ITEM Club says: “Scotland’s major cities are likely to perform better than the Scottish average, with Edinburgh and Glasgow’s economies running ahead of Scotland in each year of the forecast. Sectors such as information and communications, and business services…are set to lead the way.”

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Assessing the outlook for economic growth in Scotland, the think-tank adds: “In part due to Scotland’s labour market demographics, growth will remain low in historical terms and is expected to lag the UK as a whole. However, when London is removed from the forecast, Scotland’s expected growth performance is similar to the rest of the UK.”

The EY ITEM Club projects a “slight” rise in unemployment in Scotland in 2024, to 4.2%, noting this is “lower than the 4.5% forecast for the UK”.

It expects employment in Scotland “will remain broadly flat through 2024”, adding: “Over the period 2024 to 2026 we forecast total employment to grow by an average of 0.6% per year, lagging the UK average of 0.9%.”

EY Scotland managing partner Ally Scott said: “This year has seen a similar pattern to 2022, with periods of growth punctuated with points of decline. The net result is that while Scotland’s economy has avoided a technical recession so far this year - with a more resilient performance than expectations suggested - it was nevertheless slightly smaller at the end of Q2 2023 than it was a year earlier.

“We expect to see promising signs in the economic outlook towards the end of 2024 into 2025 and 2026 as the economy gathers pace, lifting employment numbers above pre-pandemic levels.”

He added: “Scotland’s major cities are likely to perform better than the Scottish average thanks in large part to their sector profiles, with Edinburgh and Glasgow running ahead of the rest of the country in each year of the forecast. This, along with a weaker expectation for Aberdeen, continues a five-year trend leading up to the pandemic. However, we will watch with interest to see if recent policy and project developments for the North East - especially on construction related to energy transition - deliver a positive impact for both the local and wider Scottish economy.”

EY Scotland managing partner for financial services Sue Dawe said: “Many sectors experienced a see-saw of trading conditions as government, society and businesses navigate continued global uncertainty.

“Manufacturing output and mining and utilities activities have fallen, which means overall output from Scotland’s production industries shrank in the first half 2023. However, international goods exports have been more encouraging, with Scottish goods exports growth slightly ahead of the UK in value terms.”

She added: “Continued economic strains have a broadly similar impact on Scotland’s economy as they do on the rest of the UK and global markets, but the expected recovery of household finances later in 2024 will benefit consumer-facing sectors, as public services also bolster the rate of economic growth.”