Growth forecasts downgraded as Scots warned mortgage rates and prices could rise

High interest rates and inflation have led experts at a think tank to downgrade their economic forecasts for Scotland for the next two years.

The Fraser of Allander Institute has also cautioned that there could be more price hikes and rises in mortgage rates on the way.

The warnings came as the economic think tank downgraded its forecast for the next two years.

Back in March it said it expected Scotland’s economy would grow by 0.9% next year, followed by growth of 1.7% in 2025.

However, it now expects to see growth of 0.7% in 2024, with a further rise of 1.2% in the following 12 months

Professor Mairi Spowage, of the think tank, said it was now “less optimistic about growth next year and the year after”.

The economic experts at the think tank, who had previously forecast Scotland would be in recession in 2023, also revised their expectations for this year, with growth of 0.5% now expected.

But in its latest commentary, the Institute stated: “Our views on growth for 2024 and 2025 have become more pessimistic given the likelihood that inflation and interest rates will be more elevated for a longer period of time.”

According to the report, “growth in both Scotland and the UK continues to be slow and fragile”.

The experts said they still expected that inflation – which stood at 8.7% in May –  will come down over the remainder of 2023.

But the report, which is sponsored by Deloitte, stressed: “This does not mean that prices will start to come down – only that they will not be rising as quickly.”

It added: “It is now not likely to be until 2025 when inflation gets back to the Bank of England’s target level of 2%.”

Prof Spowage said: “We have improved our outlook for growth in 2023 due to outturn economic data being significantly better than was expected.

“However, the increased downward pressure on demand that is going to impact growth in 2024, and maybe beyond, has led us to be less optimistic about growth next year and the year after.”

She warned there may be further price rises ahead of consumers, with the institute stating that so far most firms were “still choosing not to pass price increases onto consumers”.

The professor said: “In the main, businesses have been trying to absorb costs rather than pass them on to their customers.

“The signs are that more of them will have to pass through costs soon, though, which may lead to further price rises for consumers.”

Douglas Farish, senior partner at Deloitte in Edinburgh, said: “While Scotland’s economic performance has exceeded expectations from just a few months ago, challenges for businesses will persist throughout this year because of ongoing high inflation and rising interest rates.”

With the Bank of England having recently increased interest rates to 5% in a 13th consecutive rise, the institute warned more hikes were likely on the way.

It stated: “With stickier inflation reinforcing expectations that the Bank of England will increase interest rates further in the medium term, mortgage rates are likely to continue to rise before we see any easing of cost pressures in the housing market.”

Mr Farish said: “The risks posed to the housing market are in plain sight, with rising inflation and interest rates hardening the mortgage crunch for millions of people.”