Scottish recovery may be slower than UK – with risk of 'double dip'

Published on Tuesday 17 November 2009 20:52

SCOTLAND is expected to emerge from recession by the end of the year, though there is a possibility it may struggle to join the rest of the UK on the road to recovery and may suffer from a "double-dip" downturn.

Economists at the Fraser of Allander Institute at Strathclyde University Business School are forecasting a 5 per cent fall in GDP this year and just 0.1 per cent growth in 2010, rising to 1.6 per cent in 2012, well below trend.

They say that Scotland has suffered from a combination of tight bank lending, a battered financial services sector, a large public sector and an under-sized manufacturing base.

There is a warning of two quarters of negative growth in the second half of next year – a double dip recession – and of a "long and bumpy" return to the levels of output and employment that the country enjoyed before the recession.

Since the slump began in the second quarter of 2008, Scotland's economy has contracted by 6 per cent, against 5.8 per cent for the UK over five quarters. The latest Economic Commentary, sponsored by PricewaterhouseCoopers (PwC), reveals Scotland will probably emerge from 2009 with 0.2 per cent growth in the final quarter.

Paul Brewer, senior partner in PwC's Edinburgh office, said: "While this is undoubtedly positive news, it is important that we don't get ahead of ourselves. The recession bit deeply and sharply, perhaps more so than on previous occasions, and as a result the Scottish economy may take a little longer than the rest of the UK to recover. For businesses, a key area of concern continues to be around credit and getting their hands on it.

"While banks are beginning to release credit to both medium and large companies, there is growing evidence that they are still being selective and risk-averse, seeing concerns around credit quality as they remain focused on the need to build balance sheets.

"Evidence on the ground suggests that finance directors and senior executives, particularly in smaller businesses, continue to find renewing and refinancing facilities difficult to obtain.

"If a double dip is indeed on the horizon, it could be a rocky road for these vulnerable, cash-strapped businesses."

The commentary notes that Scotland and the UK are still lagging behind as the rest of Europe, Japan and the United States start to recover from recession. There is a widespread expectation that the UK economy will come out of recession in Q4 of this year, exhibiting a small but positive growth rate. The institute is forecasting weaker growth in 2009 than previously expected, but a stronger recovery in 2010 and 2011 as growth in the world economy picks up more rapidly.

Brian Ashcroft, professor of economics at the University of Strathclyde, said: "We expect Scotland to emerge from recession in the fourth quarter of 2009, although there is a chance that it might not do so even though recovery begins in the UK economy as a whole. Rapidly recovering growth in the global economy should support faster growth in Scotland in 2010 than previously forecast. But it won't be plain sailing.

"The economy is facing headwinds that may cause growth to falter in 2010: if the availability of bank lending is insufficient, if fiscal consolidation occurs too soon, and if the recovery in asset prices in the world economy is abruptly halted by the expected tightening of monetary policy later next year. The risk of a double-dip recession remains."