Economic growth in Scotland is projected to slow down, with revised forecasts from Ernst & Young LLP indicating a Gross Value Added (GVA) growth of 0.9% in 2025, a decrease from the previously anticipated 1.3%.

This adjustment reflects concerns surrounding potential U.S. tariffs on whisky, Scotland’s largest export, as the United States represents its largest market.

The EY Item Club Scotland report points to a favorable overall GDP data that suggests Scotland has outperformed the UK economically last year.

However, it notes that this performance conceals a deteriorating quarterly growth profile, with an expected 0% growth in the fourth quarter of 2024. Rising inflation has compounded these issues, with the inflation rate increasing significantly from 1.7% in September to 2.5% in December 2024, followed by a further rise to 3% in January 2025.

Projections for the coming years show a return to growth with GVA forecasted at 0.9% in 2025, subsequently followed by 1.5% growth in 2026 and 1.3% in 2027. A spokesperson from Ernst & Young emphasized that the private services sector and construction are expected to be key drivers of GVA growth, sustaining above-average growth over the next few years.

Despite these growth forecasts, the report outlines a cautious atmosphere among households and businesses, exacerbated by anticipated increases in national insurance contributions (NICs) set to begin in April.

This uncertainty has resulted in a decline in consumer and business confidence, as reflected in the Composite Consumer Sentiment Indicator, which has dropped to its lowest level since early 2024.

The potential imposition of U.S. tariffs presents a significant risk to the economic outlook.

Even prior to the recent UK Budget, ONS figures indicated that a considerable portion of Scottish businesses (41%) anticipated they would respond to elevated employment costs by raising prices or absorbing costs, while only 16% indicated a likelihood of reducing headcount.

The report warns of stagnated growth in specific sectors, particularly wholesale and retail jobs, while there may also be slight declines in arts, entertainment, and recreation.

Additionally, the hospitality sector could see modest growth, although it remains susceptible to adverse impacts due to the relatively low wage structure and the concurrent rise in NICs and minimum wage requirements.

Ally Scott, managing partner at EY Scotland, noted the ongoing challenges of low productivity and high labour market inactivity.

Despite Scotland's last year's economic outperformance, the pronounced slowdown at the close of the year necessitated a reassessment of growth forecasts.

The report emphasizes the immediate need for both public and private sectors to enhance productivity, manage labor market dynamics, and convert these challenges into economic opportunities.

Sue Dawe, managing partner for financial services at EY Scotland, highlighted the critical nature of addressing skills shortages and boosting workforce participation to rejuvenate Scotland's labor market.

While household incomes are projected to rebound, inflationary pressures may deter investments and affect hiring rates.

The outlook for mortgage lending is slightly more optimistic, with predictions indicating that it could more than double in 2025 as declining interest rates could facilitate increased housing market activity, which would be favorable for the construction sector.

However, experts suggest that sustained investment in infrastructure will be necessary to maintain growth momentum.