The Scottish economy is set for slow and steady growth but a decline in North Sea activity remains one of the key long-term challenges for the country, according to a new report.
KPMG's first ever Scottish economic outlook report forecasts growth of 0.4% this year and 1% next.
But long-term challenges remain in a number of sectors including oil and gas, where Scotland is able to "reap advantages of the energy transition" if it can turn declination into opportunity.
The report also outlines a slowing rate of population growth as another challenge facing Scotland.
The report says: "Unlike the rest of the UK, the Scottish economy managed to avoid a technical recession in 2023, posting growth of 0.1% for the year.
"As a result, GDP at the end of 2023 was just 1% above its pre-Covid level, broadly matching the UK performance."
Weaker investment outlook
Higher interest rates are continuing to hamper investor confidence, according to the report.
A 1.4% fall in investment in 2024 is expected before a return to modest growth in 2025.
The North Sea is a major factor for this. The report says: "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."
Yael Selfin, Chief Economist at KPMG, 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."
James Kergon, Senior Partner at KPMG Scotland, added: "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."