Scots economic growth stalling as eurozone debt crisis takes its toll

THE impact of the eurozone debt crisis on Scotland’s economy will be laid bare this morning when figures show the private sector grew in May at its slowest pace since the start of last year.

The Bank of Scotland’s purchasing managers index (PMI) says a slowdown in the global economy, triggered by Europe’s sovereign debt crisis, is taking its toll on Scots firms, with manufacturers reporting a fall in orders and service sector firms posting a “sharp drop” in growth.

Donald MacRae, chief economist at Bank of Scotland, warned: “Growth in the private sector of the Scottish economy slowed sharply in May. The Scottish economy is struggling to maintain growth momentum in the face of the global slowdown.”

The PMI dropped from 53.5 in April to 50.8 in May, barely remaining above the 50 mark that indicates growth.

Concerns over the effect on the Scottish economy of the eurozone debt crisis are echoed at a UK level by figures out today from accountancy firm BDO, which show the crisis has cast a “dark shadow” over long-term growth prospects by undermining confidence.

BDO’s “optimism index” – which measures businesses’ expectations of their performance three to six months ahead – has dropped for the third consecutive month, from a peak of 98.0 in February to 95.5 in May. The index suggests businesses expect growth to tail off later this year.

Neil Craig, head of BDO in Scotland, said: “Given that half the UK’s export goods go to the eurozone, it’s hardly surprising that the ongoing turbulence there is denting longer-term growth prospects here.

“The biggest issue for UK businesses at the moment is that the strength of the pound against the euro has made UK exports much more expensive, significantly denting export and growth prospects.”

He added that it was “clear that UK business people are worried by the eurozone crisis and are scaling-back plans for hiring and investing. This massively threatens the already-fragile growth prospects for the economy”.

Confidence among City investors is also falling, according to a separate report by spread betting firm Capital Spreads, which found that less than half of fund managers expect the UK economy to improve in the next 12 months.

Sentiment has declined over the past three months, with only 49 per cent of managers now expecting an improvement in the economic outlook, down from 68 per cent in March.

Angus Campbell, head of market analysis at Capital Spreads, warned: “Sentiment among investors has deteriorated in the past few months after equity markets got 2012 off to a good start, with the belief that the eurozone crisis could be contained.

“Its resurgence, compounded with an ailing UK economy – which, if we’re being honest with ourselves, has never really been out of recession – has led to this deterioration in confidence.”

The survey also found that fewer than one in two asset managers believe the economic benefit from the London Olympics will outweigh the expense of hosting the Games.

The raft of downbeat reports comes just a day after Chancellor George Osborne blamed the eurozone debt crisis for “killing off” the UK’s economic recovery, with businesses being held back by the uncertainty over Europe.