Economy on the up but key report sounds note of caution

SCOTLAND'S economy is continuing to emerge from recession with business confidence at a 30-month high, but the pace of recovery is set to remain subdued in the new year.

• "The fragile recovery will be restrained by the planned cuts in government spending" - Donald MacRae, Lloyds TSB Scotland chief economist

A key report out today reveals that the economy put in its best performance of 2010 during the three months to the end of November, with the production sector leading the way.

An increasing number of manufacturing firms expect export activity to rise in the months ahead as demand for their products strengthens.

Overall, it was the strongest showing in two and a half years for the Lloyds TSB Scotland Business Monitor, which is produced for the bank by the widely- respected Fraser of Allander Institute. However, the report also contains several notes of caution, as the robust growth recorded earlier this year is already slowing.

Lloyds TSB Scotland chief economist Donald MacRae said: "Both consumer and business confidence remain positive, but at low levels, keeping consumer spending and retail sales increasing at moderate rates. Although claimant count employment is plateauing and appointments to jobs are increasing, temporary rather than permanent positions predominate.

"The fragile recovery will be restrained by the planned cuts in government spending in 2011."

The report predicts that the Scottish economy will grow by 1.25 per cent next year, less than expected for the UK as a whole.

The British Chambers of Commerce forecasts the UK economy will expand by 1.9 per cent in 2011, while the Office for Budget Responsibility has predicted growth of 2.1 per cent.

During the three months to 30 November, one-third of the 403 Scottish firms surveyed by Lloyds TSB reported a rise in turnover, while a third reported a decline. The remainder said turnover remained static.

The resulting net balance of zero was an improvement from the negative 8 per cent recorded in the same period last year.

The overall net balance for turnover by production firms was negative 1 per cent, while that of services was a positive 2 per cent.

Expectations for turnover in the coming six months fell in both production and services, though the latter was notably more pessimistic. Overall, just 24 per cent of firms expect sales to rise between now and May, while 29 per cent say turnover will most likely fall.

The outlook for exports continues to be positive, with the most upbeat reports coming from manufacturers, one-third of whom expect export activity to increase.

Just 11 per cent predict a decrease, giving a net balance of plus 22 per cent, the most positive reading for two and a half years.Concerns about the availability of credit declined significantly, but the pressure on costs remains high, with a net balance of plus 48 per cent reporting a rise in the price of trading.

MacRae said that cost pressures had returned to the levels last experienced towards the end of 2008, with no immediate signs of let-up.

Concerns about late payments fell slightly across both the production and service sectors. Manufacturers are also significantly less worried about cash-flow than previously, which MacRae said was perhaps a reflection of their improved trading experience during the last quarter.

Production businesses also showed an increased assessment of the importance of the exchange rate from the middle of 2008 onwards. However, for the past nine months the importance attached to the exchange rate has fallen amongst production businesses and remains largely unchanged among service businesses.