Recovery hopes hit as private sector fails to take off

SERIOUS doubts are today cast over the strength of Scotland's economic recovery as figures show the private sector performed worse during the final three months of last year than in any quarter in the recession.

• Donald MacRae: "The latest decline in services activity was broad-based"

The latest purchasing managers' index (PMI), published by Bank of Scotland, reveals that output in the fourth quarter of 2010 was the weakest since the first quarter of 2009 - the three-month period that tipped Scotland into recession, officially declared in April of that year.

Adverse weather hit the already troubled services sector last month, causing the PMI to slump almost ten points to 39.6 - well below the crucial 50 mark representing the boundary between contraction and growth.

December's reading was the fourth month in a row that the index languished below 50.

Although further export demand saw Scottish manufacturers continue their recent positive run, December's performance marked a 22-month low for the private sector as a whole.

Donald MacRae, chief economist at Bank of Scotland, said: "December was a difficult month signalling a weak last quarter of 2010 for the Scottish economy. However, there were encouraging signs of continuing robust export demand.

"Harsh weather hit the Scottish economy in December, resulting in a 22-month low for the PMI output index. Services performance was hit particularly hard leading to a trimming of the workforce. The latest decline in services activity was broad-based with travel, tourism and leisure showing a record decrease in output while both financial and business services showed sharp falls."

Hard-hit services firms, encompassing everything from solicitors to retailers, were forced to trim their workforces for the second consecutive month in December as a result of the tough conditions.

However, job creation in the manufacturing sector saw the general rate of private-sector lay-offs ease to a more "modest" pace, said the PMI research.

Despite the ongoing problems in the wider economy, manufacturers were unusually positive as they looked ahead to 2011. Staffing in that sector jumped to a four-month high as industrial firms anticipated a further jump in demand in 2011.

Although economists had been bracing themselves for poor figures at the end of the November and December due to the snow chaos, many are now warning that the weather merely masked more fundamental problems, particularly in services, by far the biggest contributor to UK GDP - accounting for some two thirds of output.

In two other reports today some of Britain's most influential economists warn the UK recovery is far from assured.Roger Bootle, economic adviser to Deloitte, cautions that the greatest test to the recovery - fiscal tightening - is yet to come and public-sector spending cuts could leave economic growth looking "pretty lacklustre over the next year or two".

The Ernst & Young Item Club also warns that the UK faces a year of "soaring inflation" in 2011 although it warns that the Bank of England's monetary policy committee should not raise interest rates prematurely - or it will endanger the recovery.