Scots tightening purse strings as recovery falters

Published on Wednesday 2 March 2011 17:24

CONSUMER spending could remain low this year with Scots holding off spending billions of pounds in the high street because of slumping confidence in the economy, slowing the country's "faltering" recovery, a leading economic think tank has warned.

The report, by the Fraser of Allander Institute, found that in the year after the financial crash, Scots saved 2.3 billion more than they would normally have done in the belief they needed to stockpile rather than spend.

The economists say that another slow-down in high street spending may emerge this year with consumer confidence rocked by a toxic combination of increased inflation, public sector cuts, increased VAT and global volatility.

While the institute says that a double-dip recession should be avoided, it does little to lift the gloom, warning that Scotland faces a long slow road back to the economic good times.

It also suggests that GDP will be lower in Scotland than in the rest of the UK and that unemployment will once again begin to rise soon.

Brian Ashcroft, professor of economics at the University of Strathclyde, said: "The economic recovery in Scotland is faltering after the initial strong bounce-back. 2011 will be a difficult year but we do not expect the recovery to completely stall despite the slow growth of domestic household demand and the failure of exports and investment to pick up as quickly as hoped."

The report warns that the recent good news on unemployment is likely to go into reverse this year. The institute believes that unemployment will reach 8.8 per cent by the end of the year, up from 8 per cent now.

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This, it says, is largely as a result of the weaker than expected figures for growth. It predicts that Scotland's economy will expand by just 1 per cent over the course of this year and by 1.6 per cent next year, lower than previously thought.

The state of the economy is now set to become a key election issue, with the figures from the last quarter of 2010, which were hit by the month-long chill, certain to show that Scotland slumped into negative growth. Figures for the UK have shown that the economy as a whole slumped by 0.6 per cent between October and December.

On employment, Professor Ashcroft said: "It is gratifying that unemployment is falling in Scotland, but we feel that the recovery will not be strong enough for the fall to be sustained throughout the year.Political upheaval in the Middle-East, worsening inflation, continuing weakness in bank lending and the uncertain impact of fiscal consolidation all serve to cloud the picture on future growth prospects."

On consumer spending, the institute discovered that, in the year beginning April 2009, savings rates among Scots shot up so that 2.3bn of expenditure was banked rather than spent. Some of that money would have gone on imported goods, but the institute said that around 1.4bn would have gone on Scottish goods and services.

The fact that it did not took a full percentage point off GDP during the period.

Looking ahead to this year, the institute says it has downgraded growth figures in part "due to the worsening outlook for consumer confidence in both Scotland and the UK". It says the growth figures are lower than the UK because public spending cuts in Scotland are harsher than elsewhere in the country.

Paul Brewer, senior partner at PricewaterhouseCoopers , which sponsors the Fraser of Allander reports, also warned that 2011 would be a trying year. He said: "It will be the year that spending cuts start to bite. The scale of the financial challenge will be like nothing we have seen before."

Scotland's political parties last night chose to highlight the impact of public sector cutbacks. A spokesman for the Scottish Government said UK government cuts were "far too quick and too deep" while Labour finance spokesman Andy Kerr called the Scottish Parliament "the first line of defence against the Tories".

However, Scots Tory finance spokesman Derek Brownlee said: "The consequences of not tackling Labour's legacy of debt would be more job losses and a spiral of economic decline."