Warning of threat to Scotland's fragile economic recovery

Published on Wednesday 14 July 2010 15:55

RISING costs are expected to stifle Scotland's manufacturing-led recovery, according to a report published today.

Modest growth in the manufacturing industry during the past three months is unlikely to continue in the short-term because of increasing cost pressures, the Scottish Chambers of Commerce's (SCC) quarterly business survey warned.

The report - published in conjunction with Strathclyde University's Fraser of Allander Institute - also noted a "pick up" in the tourism sector and "slight signs" of increased activity in construction.

However, this was against a backdrop of forthcoming public-sector cuts which will have a knock-on effect on suppliers.

Garry Clark, SCC's head of policy and public affairs, said: "These results show that we cannot take the recovery for granted.

"Even in the manufacturing sector, which has led the upturn in the Scottish economy over the past few quarters, there are now concerns of an anticipated drop in orders over the next three months, with cost pressures from raw materials and transportation on the rise.

"At the same time, the construction sector, which has seen some signs of increased activity, is worried over a lack of future work from the public sector."

He said businesses anticipate a "dampening effect" on economic recovery as a result of public spending cutbacks.

The survey suggests the growth in manufacturing and construction will "weaken" in the third quarter.

But Peter Hughes, chief executive of trade body Scottish Engineering, said his organisation's most recent survey found growth in overall optimism within the sector, despite the concern that there will be significant cutbacks for those involved within the public sector.

He added: "Our survey reported rising raw material costs, but since these are happening on a global scale it is not having an immediate effect on competitiveness."

Steve Graham, director from the Scottish Manufacturing Advisory Service, said companies were not currently reporting concerns about rising costs over and above their normal day-to-day business concerns.

But he said: "With inflation sitting at more than 3 per cent, amid a fragile recovery, there are concerns around controlling wage cost inflation."

Today's SCC survey also warned that retail spending is expected to remain flat and overseas tourism weak.

The scaling back of public spending will influence business confidence and could lead to harsh trading conditions for some firms.

The survey states: "Evidence of a more sustained recovery in the Scottish economy continues to remain elusive; the current signs of improvement have to contend with rising cost pressures, increased market uncertainty and the onset of reduced public sector capital and operating expenditure."

Clark added: "Business needs certainty and stability, and cuts must be managed intelligently if we are to minimise any negative impact on local communities and local businesses in Scotland. It is important to build on the successes that are apparent in the Scottish economy."

He said that public-sector projects such as the new Forth Bridge should help maintain and grow private sector jobs in the longer term..