Gloomy forecast predicts Scotland's economy is on a continuing decline

Published on Thursday 28 May 2009 22:03

SCOTLAND'S economy is set to decline throughout 2009 and into 2010, and could lag the rest of the UK in recovery from recession, it was claimed yesterday.

In a sombre assessment of prospects published today, Dr Andrew Goudie, the Scottish Government's chief economic adviser, says that while there are some signs of slowing rates of decline, business survey evidence for Scotland is mixed. A recent Purchasing Managers Index survey from Royal Bank of Scotland showed some recovery from January but the latest Scottish Chambers of Commerce Business Survey was still bleak.

Today's 54-page assessment is at marked odds with Chancellor Alistair Darling's budget prediction that the UK economy would be out of recession and starting to show growth by the end of the year.

Dr Goudie is understood to take a much more cautious view and to share the concerns of Bank of England governor Mervyn King that there is too much uncertainty to be confident of a turning point in 2009.

However, one hopeful sign is that the house price to earnings ratio in Scotland, which avoided the extreme peak for the UK as a whole, is now closer to a return to the historical norm of 3.5 times earnings. This would suggest that house prices here have less further to fall than the UK as a whole.

The downbeat report warns of future rises in unemployment and falls in output. The economy is set to closely track that of the UK with a fall in Gross Domestic Product of more than 4 per cent peak to trough.

Not only has a larger share of public spending in GDP failed to shield Scotland from the full blast of recession, but there is concern that a 1.7 per cent real terms cut in public spending taking effect from 2010-11 after a decade of powerful growth could result in a slower general economic recovery in Scotland compared with the UK.

The analysis is backlit by worries that while there are some signs of a slowing of the rate of decline, the economy in Scotland has not yet hit bottom.

A key reason for the cautious view is continuing uncertainty over the state of bank balance sheets and when the banks are likely to recover the ability and confidence to return to pre crisis lending levels.

The Scottish Government has undertaken a survey of financial conditions in the small and medium sized company sector, in particular recent experiences with banks, and the results are now being studied.

The view is there is still some way to go before the financial crisis is fully resolved and for that reason there is little cause for believing the economy will lift quickly off the bottom.

If businesses and households still see fragility in the financial sector, there is little likelihood the recession will end any time soon.

And there are too many unresolved questions to be confident of any rapid recovery.

According to the assessment, the Scottish economy has been in recession since mid-2008. Far from its large public sector providing some protection, figures for the third and fourth quarters of 2008 showed Scotland's GDP falling by fractionally more than the UK as a whole.

Figures for the first quarter of 2009 are likely to show the economy contracting very close to the 1.9 per cent fall experienced for the UK as a whole.

Women hardest hit as recession closes in

WOMEN seem to be bearing the brunt of the recession in Scotland, with a sharp increase in female unemployment.

According to findings by Scottish Government economic researchers, the employment rate for women in Scotland in the year to the first quarter of 2009 fell by 1.9 per cent. The equivalent figure for the UK as a whole was a decline of just 0.8 per cent.

Male employment in Scotland fell by 1.3 per cent over the same period, rather less than for the UK overall (down 1.7 per cent).

The notable fall in female employment has been disguised by a relatively small rise in the number of women recorded as unemployed. This is because many women have chosen to leave the labour market altogether and not 'sign on' for another job.

The unemployment rate for women in Scotland rose by just 0.8 per cent in the year to the first quarter, compared with a rise of 1.3 per cent for the UK as a whole.

This gave the impression that women were being less adversely affected than men. Male unemployment during the sale period was up by 1.7 per cent in Scotland (2.3 per cent for the UK).

However, the tell-tale figure is the sharp rise in the "economic inactivity rate" – that is, those who have left the labour market altogether.

During the period there was a 1.3 per cent rise in the inactivity rate among women in Scotland compared with a fall of 0.2 per cent across the UK as a whole. For men in Scotland and across the UK there was a fractional fall (0.1 per cent and 0.2 per cent respectively).

Over the year to the first quarter of 2009, declines in female employment accounted for some 60 per cent of the overall fall in working age employment.

This is in contrast to the UK labour market where around 70 per cent of the fall in working age employment has been due to declining male employment.

Female employment rates in Scotland (72.1 per cent in the first quarter of 2009) remain above UK levels (69.6 per cent). One reason for the fall in the rate may have been the sharp rise in employment in 2006 and early 2007 as the economy hit full throttle.

The period saw a robust increase in service sector employment, with expansion in call centres and retail outlets. It is in these areas that the downturn has been particularly marked, with high street closures and now retrenchment by Scotland's stricken banks.