ANALYSIS: The elephant in the room remains the eurozone crisis

THE latest Fraser Economic Commentary (FEC) confirms the disappointing rate at which both Scotland and the UK are recovering from the recession.

While economic growth for 2011 has been revised up a little, from 0.4 per cent to 0.7 per cent, growth for 2012 has been revised down from 0.9 per cent to 0.4 per cent. This means that three to four years after the recession started Scotland can only muster just over 1% growth over two years. This is much slower than expected and than experienced after previous downturns.

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This poor growth position is reflected in the labour market forecasts. After an improvement in the Scottish labour market in 2010, Scotland has slumped back. While UK employment is now only 1.4% below its pre-recession peak, in Scotland it remains 3.9% lower. Meanwhile, unemployment is expected to rise again in 2012, to just short of 10%, up considerably from previous forecasts, before starting to fall in 2013 and 2014.

In the case of both output and employment the forecasts must be considered to be on the optimistic side as the “elephant in the room” remains the situation in the eurozone. Here, there remains considerable potential for the situation to worsen, through Greece being forced to exit the euro or further pressure on various eurozone governments’ ability to borrow at existing rates. If this were to happen then it could have serious ramifications for the health of the UK economy, both directly, via exports, and indirectly, through damaged confidence.

• Professor John McLaren, of the Centre for Public Policy and the Regions, Glasgow University.