Analysis: Recovery in the Scots economy will be painfully slow

Both Scotland and the UK are clearly now in the midst of a double-dip recession with no clear indication of when an upturn will arrive.

Scottish output is 4.2 per cent below the level it reached before the first dip began in early 2008. The UK as a whole has fared better over this period. Output in Scotland has declined more sharply than in the rest of the UK.

The relative decline in Scotland has been concentrated in the service sector. Thus transport, communication, business and financial services and government have failed to keep up with the rest of the UK since the beginning of 2008. Some of this is understandable: financial services in Scotland were hit hard by the collapse of RBS and HBOS. Some of the companies which serviced the financial sector suffered as banks tried desperately to shrink their balance sheets.

But in the rest of the UK, the severity of the recession has been moderated by the 5 per cent growth in “government and other services” since the start of the recession. In Scotland, this sector grew by only 0.3 per cent. Given that the cuts in government spending have been broadly the same on either side of the Border, the difference in the performance of this sector is truly a puzzle.

The difficulties may lie with indebted Scottish consumers cutting back on their purchases of services. It may also be that Scottish service companies are finding it more difficult to access markets outside of Scotland.

Alongside the poor output data were a set of weak labour market data for Scotland. Here, the contrast with the rest of the UK is more pronounced. The contrasting performance stems from a relatively weak level of demand for labour in Scotland. There was an increase of 163,000 in the number either in work or seeking work in the UK as a whole in the last quarter. In Scotland, the number economically active rose by only 5,000 and was easily surpassed by the 32,000 increase in Wales.

The composition of the Scottish labour market is also changing. Part-time employment has increased by 61,000 since the start of the recession in 2008, while full-time employment has fallen by over 120,000. This has contributed to an overall reduction in the number of hours worked in the Scottish economy of around 4.2 per cent – almost exactly the same as the percentage reduction in output, suggesting that productivity per hour has stayed almost static and that output per worker has fallen because of the reduction in average hours worked.

Yesterday’s data prompt a concern that Scotland’s economic performance is falling behind that of the UK. In common with other recessions starting in the financial sector, recovery is painfully slow.

• David Bell is professor of economics at Stirling University.