Financial services suffer worst slump on record as output tumbles 8%

Published on Wednesday 23 July 2008 21:13

SCOTLAND'S financial services sector has suffered its sharpest-ever fall in quarterly output as the effects of the credit crunch hit home.

The 8.4 per cent decline during the first three months of 2008 – a record quarterly drop for the industry – was revealed in first-quarter GDP data published yesterday by the Scottish Government.

It showed that the slump in financial services output was driven by a 10.9 per cent slide in the banking sector.

While the quarterly GDP data can throw up anomalies, evidence of a sharp downturn in a key part of the economy – it accounts for about 8 per cent of total output and employs more than 85,000 people – is likely to spark alarm.

John McLaren, of the Centre for Public Policy for Regions, a research body run jointly by Glasgow and Strathclyde universities, warned yesterday that the picture for financial services north of the Border was "worrying and confusing".

"Financial services continues to contract in Scotland while seeing strong growth in the UK," he said. "In the last quarter, GDP fell by 8.4 per cent in Scotland and grew by 4.9 per cent in the UK. Since 2007 Q1, this sector has declined by over 10 per cent in Scotland and grown by 12 per cent in the UK."

The centre highlighted the challenges of collecting "good statistical information" about the financial services sector, pointing out that profits and output can be difficult to measure and apportion between countries within the UK. In Scotland, data is also collected from different sources for the banking and insurance sectors.

A spokeswoman for industry body Scottish Financial Enterprise said: "We will need to look at the figures in detail but Scotland's financial services industry operates in a global environment, and as such it has felt the impact of the difficult conditions the industry is experiencing worldwide."

Yesterday's report revealed that Scotland's overall economy grew by 0.3 per cent in the three months to the end of March, giving a seasonally adjusted annual growth rate of 2.1 per cent.

The figures compare to recently revised UK growth rates of 0.3 per cent and 2.3 per cent, respectively. Provisional UK figures for the second quarter are due out tomorrow.

On a quarterly basis, Scotland's service sector grew by 0.5 per cent, despite the slump in financial services, while the production sector declined by 0.1 per cent and construction fell by 0.4 per cent.

Niall Stuart, spokesman for the Scottish Council for Development and Industry, said: "We will probably not have a clear view of the extent of the slowdown in the economy until the publication of the next findings in October.

"However, it appears that as in previous downturns, Scotland will weather the storm more strongly than the wider UK economy."

Liz Cameron, chief executive of the Scottish Chambers of Commerce, said: "Annualised growth remains solid at over 2 per cent and we are continuing to keep pace with UK quarterly growth rates.

"This is a clear demonstration that the Scottish economy remains in good shape."

BACKGROUND

CALCULATING GDP involves bringing together indices spanning more than 300 industries. The output figures factor in receipts from profits, interest and dividends.

However, it can be difficult to measure accurately profits/output in the financial services sector. There are differences between the methods used north and south of the Border. In order to improve the quality of the data, the Scottish Government and Scottish Financial Enterprise are in talks with the Fraser of Allander Institute.