Scotland business

Scottish economy 'needs better balance'

Scottish banknotes Image copyright AFP

A leading economic forecaster has warned that a "better balance" is needed in the Scottish economy after predicting that growth will lag well behind the UK both this year and next.

The EY Scottish Item Club has forecast output growth at 1.9% in 2015 and 1.8% in 2016.

That compares with predicted UK growth rates of 2.5% and 2.4%, respectively.

While construction output is forecast to soar by 14.6% this year, growth of only 1.3% is anticipated in services.

In a report, the item club warned that the imbalance could lead to "vulnerability for future growth, unless the performance of private services picks up".

Its forecast of 1.9% growth in Scotland in 2015 was a revision downwards from its previous prediction of 2.2%.

The report said sectors suffering falls in output included financial services, extraction, metals and public administration.

On a positive note, water, electricity and gas and chemicals are all expected to enjoy growth rates of more than 5% this year, while a pick-up is expected in the retail and wholesale sectors.

Next year, "modest" employment gains are anticipated for Scotland overall, with an additional 8,000 jobs.

Dougie Adams, senior economic advisor to the club, said: "Although Scotland has been impacted by the effects of lower oil prices on North Sea-related activity, weak growth in private services is a major cause of this year's shortfall in comparison to UK growth.

"The private services sectors expected growth of 1.3% in Scotland is well below trend and compares with growth of well over 3% in the UK.

"And, as in the UK, stalling world trade growth held back manufacturing."

The club anticipates construction output to rise sharply this year as a result of major projects such as the Forth Crossing and the M8, M73, M74 enhancements.

However, the report warned that the growth in the sector may not be sustainable.

Image copyright Transport Scotland
Image caption The economic forecaster expects construction output to rise sharply this year as a result of major projects such as the Forth Crossing

Mr Adams said: "Construction represents around 6% of the Scottish economy yet accounts for 40% of GDP growth over the last two years.

"It is an impressive performance but one that may not be sustainable. What happens when the major projects come to an end, and will these improvements to Scotland's infrastructure drive up productivity in the longer-term?

"Scotland's economy has been buoyed by the construction industry but this has created an overdependence of growth on this one sector.

"Scotland needs more balanced growth across the sectors in order to secure sustainable growth."

He added: "With construction output expected to pull back to just 3% in 2016, this means the forecast of continuing GDP growth requires a return to form in key areas such as professional and administrative services where growth is forecast to return to trend of about 4% in 2016."

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