North Sea threat to Scotland's economy

Ian McConnell
·3-min read
A forecast decline in North Sea activity is flagged as a 'key challenge' <i>(Image: Andy Buchanan/ Getty Images)</i>
A forecast decline in North Sea activity is flagged as a 'key challenge' (Image: Andy Buchanan/ Getty Images)

A decline in North Sea oil activity and slowing population growth and are among “key challenges” when it comes to Scotland’s long-term growth outlook, a new report declares.

The first-ever Scottish economic outlook report from accountancy firm KPMG meanwhile also, contemplating the near-term picture, predicts gradual recovery. And it forecasts "steady" growth over the medium term.

KPMG forecasts growth of 0.4% for the Scottish economy this year, “similar to the rest of the UK, but relatively weak by historical standards”, with expansion expected to pick up to 1% in 2025.

It says: “Unlike the rest of the UK, the Scottish economy managed to avoid a technical recession in 2023…GDP at the end of 2023 was just 1% above its pre-Covid level, broadly matching the UK performance.”

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KPMG notes Scottish economic momentum “is set to be propelled by consumer spending, thanks to a recovery in real incomes and relatively low propensity to save”.

However, it believes the outlook for investment is “weaker”.

The accountancy firm says business investment in Scotland has “been hurt by higher interest rates, along with earlier global supply chain disruptions”.

The Bank of England has raised UK base rates from a record low of 0.1% in December 2021 to 5.25%.

KPMG highlights its expectation that weaker investment momentum will persist. It forecasts a 1.4% fall in investment in 2024, then a modest return to growth with a 0.3% rise next year as “near-term uncertainties ease”.

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It declares: “The gradual decline of the Scottish oil and gas industry adds further complexity. Declining opportunities for extraction have made investment in the UK Continental Shelf less attractive, which in turn directs less demand towards the onshore economy via the related supply chains.”

It adds: “Other long-term challenges relate to the economy’s productive capacity. The latest ONS (Office for National Statistics) population projections imply a slowing rate of population growth, with outright falls from the early 2030s. This is compounded by the effects of population ageing, which are expected to lead to a further decline in the labour force.”

KPMG flags upside and downside risks to its growth forecasts for this year and 2025.

It says: “Risks to these numbers include potential supply chain disruptions, particularly for the manufacturing sector, but, on the upside, looser financial conditions could see a pick-up in business investment and potentially stronger productivity leading to higher economic growth.”

Yael Selfin, chief economist at KPMG in the UK, said: “While our forecast shows weaker growth momentum compared with the pre-Covid decade, there are nonetheless some reasons for optimism. We expect consumer demand to remain relatively solid, while the adoption of new technologies could boost productivity growth in the medium term.”

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James Kergon, senior partner at KPMG Scotland, said: “Businesses in Scotland will have to adjust to the long-term challenges facing the economy, including slowing population growth and a secular decline in the oil and gas activity. Those able to turn this into opportunity will stand ready to reap advantages of the energy transition, while the productivity gap with the rest of the UK offers scope for catch-up growth.”

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Ms Selfin said: “The big question mark remains around the outlook for investment, which is forecast to fall for the first time since the Covid pandemic.

"However, with many projects currently put on hold, the question is hopefully when – and not if – businesses will resume capital expenditures. The expected fall in interest rates could provide a much-needed boost, although the near-term outlook for monetary policy is somewhat less clear than at the start of the year.”

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