Last year was a bad one for the Highland economy and unfortunately I expect 2023 to be similar.
The official government forecasts from HM Treasury show a fall in UK economic output (gross domestic product, GDP) of 0.8 per cent in 2023. The Scottish Fiscal Commission are predicting a 1.2 per cent fall in Scottish economic output.
There are no official forecasts for the Highland economy but it is very likely that the GDP performance will be even worse, with probably a fall of about 1.5 per cent. The reasons for that include the greater importance of the tourism industry.
Inflation in 2023 is forecast to be about five per cent. That implies an annual fall in personal incomes of about 6.5 per cent in the Highlands. That means another substantial reduction in personal spending, which will have serious negative implications for local shops and other businesses.
Looking further ahead, 2024 will almost certainly be better but there can be little doubt that 2023 will be another bad year for the local economy.
The world economy had a very bad 2022 because of the impact of the Russia-Ukraine war and an inflation rate exceeding 10 per cent. The huge increase in oil and gas prices has badly affected the output of many industries and also consumer spending.
There is little expectation of an improvement until later in 2023, as the above forecasts show.
The Highlands have a diversified economy, dominated by the service sector, including tourism in normal years. The manufacturing sector is relatively small but includes important industries such as offshore oil and gas production, renewable energy, Scotch whisky and fish processing.
Public sector employment has held up well, because of the importance of bodies such as the Highland Council, Highlands and Islands Enterprise, NatureScot and the Crofting Commission. However, all their budgets have been under severe pressure and that will continue during 2023.
Tourism is very important for many parts of the Highlands. It had a very bad 2022 and unfortunately there are few signs of a significant improvement in 2023. There were big falls in visitor numbers last year because of the various Covid restrictions, which resulted in similar falls in revenue for local hotels, B&Bs and many local shops. Hopefully there will be a revival during 2023.
Some industries have done surprisingly well, such as Scotch whisky. New distilleries and expansions are currently under construction in various parts of the Highlands.
It is a very strange time for the energy industry in the Highlands, including offshore oil and gas, wind farms and other renewables. Oil and gas production is declining steadily but the recent huge increases in world oil and gas prices have helped existing fields and will possibly lead to a few new developments, despite environmental opposition.
In contrast, there has been disappointing progress with renewable energy developments and there are few reasons to expect 2023 to be better. A few local businesses, notably Global Energy at Nigg, are doing very well from wind farm contracts but the overall growth has been much less than predicted.
The fishing industry should have a better year because of recent international agreements on fish catches. It and the local fish farms have also benefitted from the rises in consumer prices.
Most other local businesses have been badly affected by the huge rises in energy prices. However, world oil and gas prices have fallen significantly in recent weeks.
Consumer confidence is low and I expect that to continue during the first half of 2023 at least. The lower consumer spending will have negative impacts for shops and other service sector businesses. More closures seem inevitable.
There can be little doubt that the first half of 2023 will be another bad time for the Highland economy. I hope there will be a big improvement during the second half of the year but the current indications are not promising.
Tony Mackay is a Highland economist.
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