Economic growth forecast to slow amid fears over US tariffs on whisky

Ernst & Young LLP warned growth prospects for 2025 “are weaker than previously anticipated”, with expected Gross Value Added (GVA) growth of 0.9 per cent – down from 1.3 per cent last quarter.

It said while GDP data suggests a favourable outlook with growth in Scotland outperforming the UK last year, “it masks the quarterly profile of growth which shows a slowdown throughout 2024”, with growth of 0 per cent in the fourth quarter.

This coincided with rising inflation, which surged from 1.7 per cent in September to 2.5 per cent by December, and then 3 per cent in January 2025.

The EY Item Club Scotland report forecasts growth to return at GVA of 0.9 per cent in 2025, followed by weaker than previously anticipated growth of 1.5 per cent in 2026 and 1.3 per cent in 2027.

A spokesperson said: “Forecasts indicate that private services sectors and construction will drive robust GVA growth and maintain above-average growth in the following years.”

The report suggests households have become “more cautious amid growing economic uncertainty”, and with employer national insurance contributions (NICs) set to increase from April, it warned vacancies exist with employers “struggling to fill roles”, amid the possibility of an increase in unemployment due to the national insurance rise.

Consumer and business confidence have also taken a hit, with the Composite Consumer Sentiment Indicator dropping to its lowest level since early 2024, the report said.

One of the significant risks of the economic forecast is the potential impact of US tariffs, with Scotland’s largest export, whisky, potentially vulnerable given America is its largest market.

A spokesperson said: “Even before the last UK Budget, ONS figures found Scottish businesses reported they would most likely raise prices (41 per cent) or absorb within profit margins (35 per cent) any future increases in employment costs, and only 16 per cent said they would reduce headcount. Exactly how firms will respond is uncertain.

“Across these sectors, we expect no growth in wholesale and retail jobs this year, a small decline in arts, entertainment and recreation, and relatively muted growth in accommodation and food.

“However, the downside risk to the outlook for these sectors is greater, as they also typically have relatively higher concentrations of lower-paid staff. This means they are more vulnerable to the higher NICs given changes involve reducing the threshold at which firms start paying tax combined with the 6.7 per cent increase in April in the national living wage.”

EY Scotland managing partner Ally Scott said: “Scotland continues to grapple with low productivity and high labour market inactivity.

“Despite outperforming the UK last year, which is very welcome news, the pronounced slowdown at the end of last year has led to another downward revision of our growth forecast.

“The shared challenge to both public and private sectors is the pressing need to address productivity, labour market and growth trends, and try to turn this into an economic opportunity.

“Consumer and business confidence has also taken a hit, reflecting concerns with the economic outlook and looming tax changes.

“Scotland’s proportionally higher population of private, owner-managed businesses means these challenges will be of acute concern – and that’s before inheritance tax and associated succession planning is taken into account.

“Before the last UK Budget, ONS figures found 41 per cent of Scottish businesses said they would most likely raise prices to meet any future increases in employment costs, and the reality of higher employer NICs is playing out in real time.

“Many are watching with interest to see if the mood music around energy policy shifts in the US along with the recent Rosebank (oil field) court ruling will trigger an uptick in confidence in Scotland’s energy sector.

“With the global sentiment dial shifting even slightly, we could see financing begin to flow somewhat easier into the sector to help solve some of the biggest challenges in our energy transition.”

EY Scotland managing partner for financial service Sue Dawe said: “Addressing skills shortages and enhancing workforce participation will be essential in revitalising Scotland’s labour market.

“While household incomes are expected to recover, inflationary pressures and cautious business sentiment may dampen investment and, therefore, hiring.

“Growth in mortgage lending is forecast to more than double this year as falling interest rates boost housing market activity.

“This will undoubtedly be welcome news to the construction sector, but Scotland’s infrastructure requires sustained investment and support to maintain momentum.”