Scotland 'will fall to 9th' in UK economic league table

Published on Wednesday 22 July 2009 21:58

SCOTLAND could "de-couple from economic recovery for years to come", a leading economic think-tank warns today.

It says high public spending economies such as those of Scotland and Wales will be hit harder in the coming cutback in public spending. It forecasts that as a result Scotland will lag most regions of England in growth between 2010 and 2013, coming in ninth out of 12.

The warning, from the Centre for Economics and Business Research (CEBR), follows latest figures showing Scotland's economy shrank by 2.4 per cent in the first three months of the year.

While broadly similar to the downturn across the UK, this is by far the largest quarterly contraction since collection of comparable data began in 1995, and takes the fall from the peak in the second quarter of 2008 to 5.2 per cent.

Read John McLaren's analysis of this story here

The service sector fell by 1.5 per cent on the previous three months, while the production sector shrank by 5.1 per cent and the construction sector plunged by 6.6 per cent – reflecting the slump in housebuilding activity and the collapse or mothballing of several high-profile commercial property projects.

Yesterday, Prime Minister Gordon Brown warned that economic recovery "cannot be taken for granted" and that the economy remains "fragile".

The CEBR argues that while the downturn should have a less severe impact on the Scottish and Welsh economies because of a large public sector, "the medium term prospects look less rosy".

It forecasts that Scotland's economy will grow at an average annual rate of 0.8 per cent over the years 2010 to 2013 – well below its annual long-term trend rate of 2 per cent and some 0.3 percentage points below the London region.

This small annual difference could compound to growth foregone of 1.4 billion, or 1.5 per cent of output.

The CEBR also expects the income per head divide between Scotland and London to widen by a further 3 per cent between 2010 and 2013, with Scottish households' income growing less fast than that of their counterparts elsewhere in the UK.

Scotland's latest GDP figures show that on an annual comparison, the economy contracted by 1.2 per cent. This is the same figure as for the UK as a whole and suggests that Scotland has not enjoyed much protection by virtue of having a relatively large public sector.

While the public administration, education and health sector grew by 0.7 per cent in the first three months, property and business services – a strong sector in recent years – suffered a 4.1 per cent contraction and financial services, the fastest growing sector of Scotland's economy before the global banking crisis, tumbled by 4.4 per cent on the quarter. It is now more than 14 per cent below its peak in the first quarter of 2007.

Enterprise minister Jim Mather said yesterday: "The fall in GDP confirms the scale of economic challenges experienced during the first quarter of this year. We've known since April that Scotland's economy was officially in recession."

He repeated his attack on Westminster's public spending cuts, which, he said, would jeopardise Scotland's recovery.

"Instead of reducing the Scottish budget and therefore spending in Scotland by 500 million, the Treasury must allow the Scottish Government to seize the opportunity to accelerate spending further into next year," he said.

There was little cheer from Scottish Building Federation chief executive Michael Levack. "The significant fall in output from the construction sector in Scotland is way ahead of the drops seen in the service and production sectors," he said.

"We can be certain that this drop will have translated into a further loss of construction jobs.

The message that governments at all levels must draw from these figures is clear: construction continues to need concerted support to sustain it through this painful and prolonged downturn."

However, Liz Cameron, chief executive of Scottish Chambers of Commerce, is still confident of an improvement. "Our surveys are suggesting that the rate of decline may be becoming shallower and we would expect that the fall in GDP may become less steep in the second and third quarters," she said. "The road to recovery may be lengthy, but there are signs of optimism returning to a number of business sectors."

The CEBR forecasts that cuts in government spending of 80 billion will be required to bring public finances into line, and says: "This has major implications for those regions which have come to rely heavily on buoyant public sector growth in the past."

CEBR economist Jrg Radeke said: "A high level of public spending as a share of GDP will mitigate some of the worst effects of the economic downturn in Wales, Northern Ireland, Scotland and parts of Northern England in 2009. However, this advantage will prove to be short-lived as the inevitable fiscal consolidation following the recovery will undermine growth in the high public spending regions for years to come."

CEBR chief executive Douglas McWilliams said: "Only a concerted effort to promote entrepreneurship and support private sector growth can prevent them falling further behind the more prosperous parts of the United Kingdom." The CEBR still expects the Scottish economy to perform better than the UK as a whole this year, with an output decline of about 3.5 per cent, compared with a UK average of 4 per cent.

Elsewhere, latest figures show an 11 per cent quarterly rise in insolvencies in Scotland to 6,294 in the first three months of the year. The increase on a year ago is 33 per cent.

There was one note of cheer yesterday. The FTSE 100 index rose 12.56 points to 4,493.73, up 8.2 per cent over the past eight trading days – its longest rising streak for four years.