Bleak forecast for Scotland puts more pressure on embattled Chancellor

SCOTLAND is heading towards its worst economic performance since 1980 with no hope of recovery for at least two years, according to a stark report from Ernst & Young.

The warning, one of the bleakest yet for Scotland, will add to the intense pressure on Chancellor Alistair Darling as he prepares to unveil a battle plan of growth stimulating measures in the pre-Budget report tomorrow.

The Ernst & Young Scottish Item Club warns that the economy will contract by 0.4% in 2009, marking the biggest fall in output for 29 years. The only silver lining, according to the group of economists, is that Scotland is likely to fare better than the rest of the UK, which is facing a drop in output of 1%. The increasingly depressing forecasts are expected to persuade the Chancellor to plunder the public finances by as much as 30bn to fund a range of measures, from an increase in loans to small businesses, to the acceleration of public works projects. A rise in winter fuel payments and the extension of the stamp duty holiday are also likely to be included tomorrow.

Ernst & Young warns that the recession is likely to claim at least 50,000 Scottish jobs across all industries, from financial services to tourism.

Although the housing market north of the border is likely to avoid the 25% losses expected in the south, homeowners here are warned they will still see the value of their properties reduced by as much as 19%.

Ernst & Young says the next two years will signal "unprecedented" times for Scotland, which was sheltered from the last manufacturing-driven recession in the Nineties due to its strong financial and business services sectors. But this recession will be services-led, affecting everything from Scotland's law and accountancy firms, to hotels and restaurants.

Dougie Adams, economic adviser to the Scottish Item Club, said the anomalous nature of the downturn makes it difficult to predict exactly how and when Scotland will recover. "We have lost the growth dynamics from one of our key sectors – financial services."

He warned that if the restructuring of HBOS and Royal Bank of Scotland draw more jobs away from Edinburgh than expected, the outcome for Scotland next year could be even darker.

He said: "The implications of a bigger shake-out from Scottish financial services could see a loss of 14,000 jobs from financial services over the two years to 2010, compared with a loss of 9,000 jobs in the more benign case. The additional loss of output would lead to the Scottish economy contracting by 1% in 2009."

Last week the University of Strathclyde's Fraser of Allander institute warned that in the worst case scenario, Scotland could shed 116,000 jobs over the next two years.