SCOTLAND’S economy will grow by 1.3 per cent this year as household finances remain under pressure, trailing the UK as a whole, with expansion accelerating to 1.6% in 2019, a think-tank is forecasting.

The EY Scottish ITEM Club has trimmed its forecast of non-oil gross domestic product growth north of the Border for this year from the 1.4% rate it projected in December. At that stage, it expected Scotland to grow in line with the UK as a whole this year. The Scottish economy grew by 0.8% in 2017.

The UK, which grew by 1.8% in 2017, is now forecast by the think-tank to expand by 1.6% this year. This is a more upbeat projection than that from the Bank of England, which last month cut its growth forecast for this year to 1.4%, from 1.8% in February.

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The think-tank is projecting UK growth of 1.7% next year, highlighting its expectation of a continuing lack of momentum, although this prediction is marginally ahead of the EY Scottish ITEM Club’s forecast for expansion north of the Border next year.

A low savings ratio in Scotland is flagged by the think-tank, which believes this will make consumers cautious about future spending. It also highlights the dampening impact of frozen welfare benefits and higher interest rates. The Bank of England raised UK base rates by a quarter-point to 0.5% last November and, although the previously expected May increase did not occur, economists are forecasting the cost of borrowing will rise further in coming months.

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The EY Scottish ITEM Club forecasts strong global growth will continue to boost exports by companies north of the Border.

It says: “Despite inflationary headwinds receding in 2018 and stronger pay growth, any benefits of rising real wages are likely to be limited by the low savings ratio and the likely knock-on effect of cautious future spending decisions. A cash freeze on benefits and higher interest rates will also combine to restrict consumer spending’s contribution to GDP growth in 2018.

“Since we forecast global growth to pick up in 2018, the associated growth in Scottish exports will continue to boost its economy. However, our expectation for sterling to strengthen over the course of the year will limit this contribution to overall growth”

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The EY Scottish ITEM Club forecasts “modest” employment growth of 0.7% north of the Border in 2018, slowing to 0.3% next year.

It says: “Whilst office-based private services are again expected to generate the bulk of new jobs –33,800 from 2017 to 2021 – we expect the construction sector to create 14,500 jobs as output in the sector recovers.”

The EY Scottish ITEM Club expects consumer spending growth to slow from 1.1% in 2017 to 0.5% this year. It expects consumer spending growth to pick up to 1.3% in 2019, although its report shows this would be only half the rate seen in 2016. The think-tank forecasts consumer spending growth of 1.5% in 2020 and 1.7% the following year.

It says: “In recent years, household expenditure has provided the greatest contribution to the Scottish economy. It continued to provide a positive contribution to Scottish growth in 2017, but the strength of exports meant net trade provided the largest contribution last year.

“We forecast consumer spending [growth] to slow in 2018 as households avoid further reducing their savings, and the labour market delivers weak employment growth.”

Mark Gregory, accountancy firm EY’s (Ernst & Young’s) UK chief economist, said: “Economic growth in Scotland is moving beyond the 0.8% growth rate we saw in 2017. While this demonstrates that Scotland is set to successfully pull out of an economic tailspin and return to growth of above 1%, there are also signs that UK-wide economic growth will remain firmly ahead of Scotland’s in the near term.”

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Scotland won a record number of foreign direct investment projects for a third consecutive year, with associated job numbers at the highest in a decade at more than 6,000 in 2017, a survey published on Monday by EY shows.

EY senior partner for Scotland Mark Harvey said: “In the last year, exports and foreign direct investment have been particular success stories for Scotland and offer evidence of the opportunities available from a more internationalised Scottish economy. While global trade and Brexit present uncertainties, these should not act as roadblocks to improving Scotland’s position on the world stage.”