Wake-up call to ministers over economy

Published on Saturday 7 June 2008 14:30

SERIOUS doubts have been cast over Government claims that Scotland will weather the economic downturn better than the rest of the UK.

A report published today by the Ernst & Young Item Club group of economists warns Scotland will take a bigger hit than expected from rising oil prices, now at a record $139 a barrel, and ongoing problems in the financial services sector.

The oil price jumped by $15 in two days last week, sparking fears that increased costs will be passed on to consumers and add to the woes of the global economy.

E&Y cautions that Scotland will now undergo two years of below-average performance, and will fail to reach SNP targets to match growth for the rest of the UK by 2011.

Scottish growth rates will fall to as low as 1.5% in 2008 and 1.6% in 2009, a stark reduction on earlier forecasts of 1.8% and 2.2%. The Scottish economy will also find it far harder to rebound from the credit crisis when other markets bounce back from 2010, the Item Club asserts.

The bleak report marks a significant departure from previous claims that Scotland will take less of a hit than the rest of the UK, which is more closely tied to the City and traditionally suffers from wilder fluctuations in the property market.

Growth for the rest of the UK is expected to come in at 1.8% this year and 1.5% in 2009, but is then expected to recover sharply in 2010, when Scotland will still be languishing in slower growth.

Dougie Adams, economic adviser to the Item Club, said: "The sting in the tail is that by 2011 the UK economy is likely to be growing very strongly but Scotland won't be growing so quickly then."

The Item Club raises particular concerns about the financial services sector in Scotland, which it warns could act as a "significant drag" on the Scottish economy.

"We now expect growth to average only 1.1% in financial services sector output over the next two years, compared with a forecast of 3.2% per annum in December, which itself was a substantial reduction on the average rate of growth of 6.2% in the sector through the first half of the decade," the report warns. It suggests that as many as 15,000 jobs could be lost across the financial services, leisure and distribution sectors in Scotland before 2009, although Adams said this is more likely to occur in "dribs and drabs" than through large-scale corporate job cuts.

The grim figures will come as a sharp wake-up call to the Scottish Government, which has reiterated its claim that Scotland is in "good shape" to face the increasingly desperate economic conditions.

A Government spokesman said the Scottish economy "compares favourably to the UK, with retail sales and house prices holding up well".

But the E&Y report confirms warnings made to Scotland on Sunday earlier this year that the Government should not be so complacent about the country's ability to emerge from the credit crunch relatively unscathed.

Several leading economists and corporate lawyers, including Yvonne Brady, a partner at Dundas & Wilson, advised that Scotland will also suffer severe damage from the protracted credit crisis.

Brady said: "If the Scottish market thinks we don't have a sub-prime problem, then they are wrong. Scotland won't escape unscathed. We'll feel the effects in the second half of the calendar year."