Service sector holding back Scots growth

Published on Saturday 28 November 2009 12:22

SCOTLAND'S growth as it emerges from recession will lag behind the rest of the UK next year because of "disturbing weakness" in its service sector, an influential group of economists warn today.

• Dougie Adams, senior economic adviser to the Ernst & Young Scottish ITEM club

The country is starting a "slow and patchy" recovery from the deep recession of the past 18 months, but will continue to under-perform the UK for the next year, according to research from the Ernst & Young Scottish ITEM Club. It is the only forecasting group to use the Treasury's model of the UK economy.

In its annual outlook, the club is predicting that GDP growth in 2010 will be just 0.7 per cent, in contrast to 1.1 per cent across the UK. It blames the private services sector for dragging down the Scottish economy. Over the course of this year GDP growth north of the Border is expected to have contracted by 4.9 per cent, while the UK will have shrunk by 4.6 per cent.

The recession has been more aggressive than E&Y was predicting even six months ago.

Dougie Adams, senior economic adviser to the club, said this was partly a result of the crisis at Scotland's biggest banks and the knock-on effect on the entire business services sector, including law, accountancy and IT.

Scotland's financial services sector has been the biggest under-performer since the onset of the recession. In the year to June, output in the sector shrank by 8.4 per cent, compared to 0.8 per cent in the wider UK. E&Y said the picture is just as dismal for business services, also contracting by 8.4 per cent in Scotland and just 6.3 per cent in the UK.

Adams said: "You cannot escape the fact that the recession has exposed a number of areas where there are disturbing weakness, not least financial services, business services and the hotel and catering sectors, which have all significantly under-performed compared to the rest of the UK."

Adams said that recovery will rely on external demand, both from other parts of the UK and overseas and this will require a shift towards a more export-led economy. He said that a lot of smaller businesses in sectors such as advertising and IT, which may have relied on HBOS and Royal Bank of Scotland for a lot of their business, will be nimble enough to switch their focus to new markets.

However, Adams said: "It would be wrong to argue that the Scottish economy will have to change out of all recognition over the next few years to sustain recovery."

The report said that unemployment remains an issue as the very slow return to growth will have a detrimental impact on jobs in Scotland. Further job losses in the short to medium term are inevitable and the forecast is for the country's unemployment rate to reach 8 per cent in 2010.

Adams said Scotland is in for a "long, slow grind" to recovery. "We're now 10 per cent behind where we would have expected to be at this point, and we'll remain 10 per cent behind."