'Double dip' fears grow for Scottish economy

Published on Tuesday 25 January 2011 18:52

ECONOMISTS have issued a growth warning for the Scottish economy amid fears the country will be hit even harder than the rest of the UK by the downturn which latest figures show has left Britain teetering on the brink of a double-dip recession.

Analysts and the government were taken by surprise when yesterday's GDP figures showed Britain's economy had shrunk by 0.5 per cent in the last three months of 2010. It was largely driven by a dramatic dip in the construction sector.

Ministers attempted to blame the harsh weather conditions, while Bank of England governor Mervyn King strongly indicated that interest rates should not be raised in the near future.

Two leading Scottish economists suggested this would mean the Q4 figures for Scotland, which are issued several months after those for the UK as a whole, would be even worse.

Analysts warned the next UK quarterly figures, to be published on 27 April and which will reflect the effects of the rise in fuel duty, oil prices and VAT, would show a second quarter of negative growth, taking Britain back into a technical recession.

Mr King and the Bank of England's monetary policy committee have been under pressure to raise interest rates, as inflation is running at 3.7 per cent - almost twice the 2 per cent target level.

But in a speech in Newcastle last night, he said a rise would make little difference and issued a stark reminder that Britain's recovery would be "choppy", as he braced consumers for a bleak year ahead.

He warned the public to expect inflation to rise to between 4 per cent and 5 per cent over the next few months.

He also predicted that real wages would plunge back to 2005 levels as prices soar and the government's deficit-busting actions take effect.

Last week GDP figures for July to September 2010 showed the Scottish economy grew by 0.5 per cent, following a figure of 1.3 per cent over the previous three months.

The Scottish Chambers of Commerce has already warned of an increasing slowdown throughout 2011.

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John McLaren, of think tank the Centre for Public Policy for Regions, said of the latest figures: "It is a very worrying sign. It is even more worrying in Scotland, where growth in the last three quarters has been largely driven by construction."

He said construction in Scotland had risen by 17 per cent in quarters one, two and three, whereas over the same period in England, it had risen by only 10 per cent. "Scotland is even more dependent on construction growth and if that declines here as well and the rest of the economy is not doing much, then there is going to be an even bigger net impact that will bring the economy down into negative growth," he said.

Professor Brian Ashcroft, policy director of the Fraser of Allander Institute at Strathclyde University, warned that the VAT increase to 20 per cent, which came into effect at the start of this month, would make matters worse.He said: "It is quite clear that the recovery was going to be slow. The banks are still not willing to lend, we have sovereign debt hanging over us and the problems of refinancing debt.

"I do see a possible double-dip. The Scottish economy could be worse (than the UK], but it is difficult to be certain."

He pointed out that manufacturing, which was the strongest growth sector for the UK, was weaker in Scotland. As a result, he could see an "even bigger contraction than the rest of the UK".

He added: "Recovery tends to be weaker in Scotland. One obvious reason is that the public sector is slightly bigger, so there is less private sector to lead the recovery."

Scottish Building Federation chief executive Michael Levack said: "These figures confirm our earlier warning that the modest recovery witnessed in the building industry in the middle of last year was not going to last. With the industry now facing a 21 per cent cut in public capital investment from next year's Scottish budget, it is little wonder that the confidence of our members about the outlook for 2011 continues to slide."

The Scottish Government insisted that it was supporting the construction industry and blamed Westminster cuts for the problems with the economy.

Finance secretary John Swinney said: "These shock UK figures entirely vindicate the Scottish Government's decision to defer the UK coalition government's emergency Budget cuts for 2010-11 to next year, so that we can continue investing and building recovery. Clearly, Westminster's cuts go too far and too fast, and are choking off the UK's recovery."

In Westminster the coalition government insisted its policy of slashing public spending by 81 billion over the next four years to reduce the deficit was still the right approach.

Chancellor George Osborne said: "These are obviously disappointing numbers, but the ONS has made it very clear that the fall in GDP was driven by the terrible weather in December.There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month. That would plunge Britain back into a financial crisis. We will not be blown off course by bad weather."

But his attempts to blame the harsh weather conditions were lampooned by his Labour predecessor, Alistair Darling, and questioned by many experts, who said most of the data for the GDP measurement were collected before the Arctic conditions hit.

Howard Archer, chief European and UK economist at IHS Global Insight, said: "This weakness cannot be put down only to the weather. It reinforces already serious concern over the economy's ability to grow significantly in the face of the spending cuts and tax hikes that will increasingly bite as 2011 progresses."

Shadow chancellor Ed Balls said: "We are seeing the first signs of what the Conservative-led government's decisions are having on the economy. The fact is cuts which go too far and too fast will damage our economy."