Outlook for growth in 2022 worsens as cost increases begin to bite
The Scottish economy is now above pre-pandemic levels after almost two years, but global uncertainties and inflation creates a difficult environment for consumers and businesses
Scotland’s growth forecast for 2022 has been revised down due to the impacts of cost increases on consumers and businesses – issues that are being exacerbated by uncertainties caused by the war in Ukraine.
This is according to the latest quarterly Economic Commentary from the Fraser of Allander Institute at the University of Strathclyde.
In the Deloitte-sponsored Economic Commentary, the Institute forecasts growth of 3.5% in 2022 and 1.5% in 2023. The outlook has significantly worsened for 2022 since the last set of forecasts in December 2021.
The Commentary examines all of the latest data on the global, UK and Scottish economies, including detailed analysis of the latest GDP, employment and inflation figures.
Two years on from the first lockdown the latest data shows that the Scottish economy has just recovered to pre-pandemic levels. However, this overall picture hides a disparate sectoral story, with hospitality and leisure businesses still operating significantly below pre-COVID-19 levels of output.
The analysis in this quarter’s Commentary shows that consumers are starting to feel the pinch, with many consumers noticing increases in their food shopping, their energy bills, and the cost of fuel. This is before the expected increases in April as the energy price cap moves up still further.
This follows the Chancellor’s Spring Statement in March which was presented in part as a package of measures to assist households through this difficult time.
Director of the Institute, Professor Mairi Spowage, said: “The measures introduced by the Chancellor’s Spring Statement are not likely to be sufficiently targeted to help those on the lowest incomes. Consumers and businesses are going to feel the squeeze in the coming months, if they haven’t already, with soaring energy and food bills.
“This has the potential to limit the economic recovery we hope to see during 2022, as consumers cut back on discretionary spending, and even perhaps businesses limit production due to input costs.
“These circumstances have led us to revise down our expectations for growth during 2022. Of course – and we feel like we have said this a lot over the last 2 years – economic forecasting is a tricky business at the best of times, but forecasts are highly uncertain right now.”
Steve Williams, Senior Partner at Deloitte in Scotland, said: “Despite the easing of pandemic-related restrictions more recently, expectations for an economic recovery are being dampened by a number of factors, not least the war in Ukraine. Businesses continue to face a variety of difficulties including soaring operating costs and labour shortages, while the cost of living crisis continues to grow in parallel with learning to live with COVID-19.
“Businesses have proven their resilience throughout the pandemic but as such significant challenges remain, it is important that business leaders continue to prioritise how they support their employees. Employee health and wellbeing must be placed at the centre of working practices to help ensure more engaged, resilient and productive teams over the longer term.”
This quarter’s commentary also analyses the latest data from the Scottish Business Monitor, discussing the impact of supply shortages and the ongoing energy crisis on businesses in Scotland.
The latest research from the Fraser of Allander Institute finds that more than a half of Scottish firms are finding it difficult to source goods and services.
Adam McGeoch, economist at the Institute, said: “Increasing costs due to global supply chain issues and rising oil and gas prices are key concerns for Scottish businesses, with one in five firms expecting to reduce operations this year due to higher energy bills.
“Labour shortages are also feeding into supply constraints as businesses struggle to attract and retain staff. Our analysis finds that 3 in 5 Scottish firms are finding it difficult to hire due to a lack of skills and experience.”
There is further analysis in the commentary to set the scene for the local government election in May, and a deep dive into the increase in inactivity in the labour market, known as the “great resignation”.
This quarter’s commentary also includes 4 perspectives which are the winning essays from our Economic Futures essay competition:
- An exploration of how financial inequality prevents the success of Scotland’s climate change aims – Ellen Keefe, University of Strathclyde
- Scotland in Climate Change time: an analysis on policies and opportunities in transportation, forestry and agriculture – Xiaxouan Sha, University of Strathclyde
- How will climate change, over the coming decades, impact the urban and rural areas of Scotland differently? – Craig White, University of Edinburgh
- Scottish Government’s current approach to changing climate behaviour – Chizulum Ifezulike, University of Strathclyde
Mairi is the Director of the Fraser of Allander Institute. Previously, she was the Deputy Chief Executive of the Scottish Fiscal Commission and the Head of National Accounts at the Scottish Government and has over a decade of experience working in different areas of statistics and analysis.
Adam is an Economist Fellow at the FAI who works closely with FAI partners and specialises in business analysis. Adam's research typically involves an assessment of business strategies and policies on economic, societal and environmental impacts. Adam also leads the FAI's quarterly Scottish Business Monitor.
Find out more about Adam.
Ben is an economist at the Fraser of Allander Institute working across a number of projects areas. He has a Masters in Economics from the University of Edinburgh, and a degree in Economics from the University of Strathclyde.
His main areas of focus are economic policy, social care and criminal justice in Scotland. Ben also co-edits the quarter Economic Commentary and has experience in business survey design and dissemination.
Calum is a Knowledge Exchange Assistant at the Fraser of Allander Institute (FAI) and a researcher at the Centre for Inclusive Trade Policy (CITP). He regularly contributes to key FAI publications like the quarterly Economic Commentary and the Scottish Business Monitor, as well as lectures on Strathclyde's Applied Economics Master’s programme.
Kate is a Knowledge Exchange Assistant at the FAI working across a number of project areas. She is currently studying for her MSc in Economics at the University of Edinburgh and has a bachelor’s degree in Economics from the University of Strathclyde. Kate is also the Outreach Coordinator at the Women in Economics Initiative which aims to encourage equal opportunity and improve representation in the field.