Item Club in warning over slow growth

A KEY report will tomorrow issue a bleak warning that Scotland's economic growth is likely to be 0.5 per cent lower than expected this year as high prices deal a "hammer blow" to household budgets.

The Ernst & Young Scottish Item Club will caution that Scotland's recovery is now "almost completely dependent" on private sector growth and investment.

The research group says GDP output will not match pre-recession levels until the end of next year at the earliest while private sector growth will also be at the mercy of global macro economic events - including the Greek sovereign debt crisis.

The tone of the Item Club's latest quarterly report will be at odds with other recent surveys which have painted a positive picture of Scotland's path to recovery.

On Friday, the latest business monitor from Lloyds TSB revealed that Scottish businesses were at their most optimistic for three years.

The positive outlook chimed with similarly upbeat Purchasing Managers Index surveys for Scotland over the past three months but differed radically from stern warnings from the likes of Bank of England governor Mervyn King, who last week rattled business leaders and households when he said Britain was in the midst of "seven lean years".

While the Scottish Government has been eager to trumpet the country's economic successes, finance minister John Swinney twice warned last week that there was no room for complacency.

The Scottish Item Club will tomorrow downgrade its forecasts to 1.7 per cent growth this year and 1.9 per cent next year. This compares with expected GDP figures for the UK as a whole of 1.9 per cent this year and 2.4 per cent in 2012.

Dougie Adams, senior economic advisor to the Scottish Item Club, pointed out that the report covers the economy as a whole, including the public sector, which will continue to feel the squeeze of spending cuts until 2015.

According to the last available figures, public sector spending accounts for at least 38.5 per cent of Scotland's GDP. Adams expects public sector employment to be 5 per cent lower than its 2008 peak by mid 2012, which will represent a loss of 40,000 jobs over four years.

However, the job losses will continue until 2015, he said, and by then Scotland will likely employ 80,000 fewer people in the public sector compared to 2008.

Although businesses are creating jobs at a far higher rate than expected, the "soft patch" in the economy will continue for a while longer. Adams said: "Scotland's economic output will not match pre-crisis levels until the second half of next year, with above trend growth unlikely before 2013. This setback can be attributed to the squeeze on households, which is proving to be greater than anticipated."

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