Scotland faces rough journey out of recession

Published on Tuesday 17 November 2009 14:29

SCOTLAND is likely to emerge from the recession by the end of the year but the financial outlook remains poor, economists said today.

The Fraser of Allander Institute has predicted growth of just 0.1% in 2010.

Recovery will be slower in Scotland than the rest of the UK because of its large public sector workforce, the body said.

Spending cuts by the Government as it seeks to rebalance its books could have a greater impact on the Scots economy.

The Institute, based at Strathclyde University, warned of the prospect of a "double-dip" if fiscal consolidation happens too soon and businesses fail to secure lending from the country's struggling banks.

Professor of Economics Brian Ashcroft said: "We expect Scotland to emerge from recession in the fourth quarter of 2009, although there is a chance that it might not do so even though recovery begins in the UK economy as a whole.

"Rapidly recovering growth in the global economy should support faster growth in Scotland in 2010 than previously forecast. But it won't be plain sailing.

"The economy is facing severe headwinds that may cause demand growth to falter in 2010.

"If the availability of bank lending is insufficient, if fiscal consolidation occurs too soon, and if the recovery in asset prices in the world economy is abruptly halted by the expected tightening of monetary policy later next year, the risk of a double-dip recession remains."

In its latest economic commentary, the Institute said Scotland was likely to record 0.2% growth in the final quarter of 2009 which would see it join the UK in coming out of recession.

Both are lagging behind the rest of Europe, Japan and the US who have already started to recover.

The report said 2010 could see one quarter of negative growth but its "low growth" scenario suggests there could be two – meaning a return to recession – while unemployment is likely to peak at 234,000.

Researchers predict 1.1% growth in 2011 and 1.6% the following year when household spending and exports will strengthen but Government spending will be reduced.

The jobless total in 2012 is expected to be around 172,000.

The manufacturing industry is likely to make the swiftest recovery but economists expressed concerns over whether it was fit enough to take advantage of the current low exchange rate and increasing global demand.

Paul Brewer of PricewaterhouseCoopers in Edinburgh, sponsors of the report, said: "The recession bit deeply and sharply, perhaps more so than on previous occasions and as a result the Scottish economy may take a little longer than the rest of the UK to recover.

"For businesses, a key area of concern continues to be around credit – and getting their hands on it.

"Evidence on the ground suggests that finance directors and senior executives, particularly within smaller businesses, are continuing to find renewing and refinancing facilities difficult to obtain especially if they wish to change lender.

"By spending significant amounts of time on this part of their business, they are in danger of taking their eye off the 'strategy' ball – something that is particularly risky as we enter the upturn, a period when historically more companies become distressed.

"If a double dip is indeed on horizon, it could be a rocky road for these vulnerable, cash-strapped businesses."

Finance Secretary John Swinney said that, while Scotland continues to have a lower rate of unemployment and a higher rate of economic activity than the UK, the Government would continue to invest to ensure a strong and quick recovery.

Mr Swinney said: "While there is emerging evidence of grounds for some cautious optimism among business surveys, clearly any economic recovery is fragile at this stage.

"This year the Scottish Government has brought forward capital investment in vital projects, supporting thousands of jobs.

"Cutting off that crucial cash flow next year when, as the Fraser of Allander report makes clear recovery is far from guaranteed, would be exactly the wrong thing to do.

"That is why the Chancellor, in his pre-budget report in December, must provide the Scottish Government with the facility to accelerate further capital spending into 2010/11, and help drive our economy forward to sustained growth next year."