Scotland’s economic growth could be slowed by a ‘harsh winter’, despite its ranking as one of the most productive parts of the UK.
PwC has predicted growth in Scotland will sit approximately 0.5 percentage points behind the UK average this year and, like the rest of the country, will be highly dependent on gas prices.
The two possible scenarios outlined in the professional services firm's economic outlook reflect geopolitical uncertainty:
- ‘Mild winter’ scenario, in which there is recovery of some supply of Russian natural gas exports, a reduction in gas prices to their September starting level, and where the UK Government provides considerable support in response to the cost of living crisis.
- ‘Harsh winter’ scenario, in which the supply of Russian natural gas exports to Europe remains highly disrupted, with prices remaining around their recent high point, and where government’s support is more considerable than the mild winter scenario, but less able to mitigate the adverse impact of high gas prices.
Scotland is likely to report growth of between 3.1% in the ‘mild winter’ scenario and 2.6% in the ‘harsh winter’ scenario by the end of 2022, followed by two years of slow, or even negative, real GDP growth.
PwC’s expectation for the UK as a whole is that year-on-year changes in economic output will range between -1.3% to 0.2% in 2023 and between -0.3% to 0.6% in 2024 under the ‘harsh winter’ and ‘mild winter’ scenarios respectively.
The outlook also projects a highly variable peak inflation rate, depending on the outlook for volatile energy prices and the size and form of anticipated government intervention.
Assuming no government intervention directly targeting domestic energy prices - and assuming natural gas prices follow their market implied paths as at the beginning of September - headline inflation would peak at 17% in the first half of 2023. This rate, however, could peak at between 10% to 13% if the UK Government proceeds with a proposed policy to freeze household energy bills.
Jason Morris, regional market leader at PwC Scotland, said: “The size and scale of any downturn will be influenced by the path of natural gas prices and the degree of government support available - with both businesses and consumers facing two very difficult situations in the shape of a potential five-decade high in the inflation rate, and the largest fall in real wages since records began.
“With average income levels sitting below the national average, and due to the fact that lower income households tend to see a higher budget share on fuel and food, there’s a real risk that households in Scotland could feel the impact more keenly.”
Of all 12 regions studied as part of PwC's UK-wide analysis, Scotland was only behind London and the south east in terms of productivity, at £39 per hour worked - two percentage points below the UK average.
As well as relatively high productivity in comparison with the other regions, Scotland is also one of only two regions to have experienced a fall in economic inactivity from the first quarter of 2020 to the same period in 2022, with a fall of 0.2 percentage points.
Morris commented: “The regional polarisation in productivity is driven by a number of factors, most notably imbalances between skills, workforce demographics and regional income.
“In Scotland, we’re fortunate to have a higher proportion of our population sitting within the economically active working age population - between 16 and 64 - which seems to contribute to our slightly higher levels of productivity in comparison with the other UK regions.”
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