Scotland recession latest: Economy is No1 priority, not independence, says business

THE threat of recession is looming again for Scotland, experts have warned, as a raft of new reports paint a gloomy picture of the state of the flagging economy.

In its quarterly Business Survey, the Scottish Chambers of Commerce claims today that the “fragile” recovery seen in the first half of last year had waned in the final six months of 2011 – and is likely to get worse in 2012.

Government spending cuts, coupled with the instability in the eurozone, have left the Scottish economy in a poor state.

The majority of businesses are pessimistic about their prospects over the next few months, as UK demand for goods and services has weakened and the pick-up in construction seen at the beginning of last year has proved to be short-lived.

Separate figures from the Scottish Retail Consortium (SRC) heralded the worst December trading for shops in at least 12 years, as sales in stores which have been open for more than a year edged up by just 0.4 per cent. Even food sales, which have been driven higher in recent times due to rising commodity prices, struggled as shoppers looked to discounted and promotional products.

The overall rise was the worst since the SRC began to collect retail data in 1999.

Food sales in the month when many Scots indulge in more eating and drinking than at any other time of year dropped by 0.1 per cent – again the poorest performance on record. Meanwhile, the latest inflation figures from the Office for National Statistics (ONS) showed a figure of 4.2 per cent in December, according to the Consumer Price Index measure – still well above the government’s target level of two per cent, despite a drop from 4.8 per cent the previous month.

The Scottish Chambers of Commerce (SCC) report, compiled in partnership with the Fraser of Allander Institute at Strathclyde University, revealed a Scottish business sector with little chance of imminent recovery, fuelling fears of a return to recession, which is likely to pile even further pressure on jobs. Mirroring the rest of the UK, it is thought that Scotland’s output could have fallen into negative territory in the final three months of 2011 – a trend which could continue into the first quarter of this year.

Two consecutive quarters of negative growth would mean that the country would be officially back in recession.

“For many Scottish businesses, the combination of limited improvements in turnover, rising costs, pressures on margins and declining trends in profitability pose real problems in 2011,” said the report.

“At the end of 2011 we see little evidence in the results to change this view. If anything, our concerns for 2012 are greater and threat of recession more apparent.”

It added: “Demand remains weak as a combination of uncertainty, limited access to capital; reduced household income limits business activity and restricts plans for the future.

“The continuing concerns as to the future of the eurozone, the impact of government spending cuts and reorganisation of public services continue to adversely influence both activity and sentiment in Scotland and in the rest of the United Kingdom.”

Iain McMillan, director of the Confederation of British Industry (CBI) Scotland, said today’s data fuelled a pessimistic outlook for Scotland and admitted he could not rule out a return to recession for the economy.

The figures for Scotland’s Gross Domestic Product (GDP) for the third quarter of 2011 are due out today, while UK-wide GDP figures for the final three months of 2011 will be published next week.

“Certainly, these two Scottish surveys are consistent with our economic forecast for 2012,” he said. “The economy has not recovered in the way that we thought it would at this time last year and recovery is going to take longer than anticipated.”

He added the crisis in the eurozone, as well as a slower-than-expected recovery in the US and fears that China’s booming economy may soon “overheat”, were all having a knock-on effect on businesses north of the Border.

“There is a tendency for even businesses which are doing well to sit on their hands and not invest at this time of uncertainty,” he said.

More than 80 per cent of Scottish retailers reported a slump in sales in the final three months of last year, while declining employment trends were reported in all sectors, which are expected to continue into the foreseeable future.

“We expect another difficult year for the economy. Internationally, the ongoing uncertainty surrounding the eurozone impacts directly on the UK economy and especially on our major export markets,” said Garry Clark, head of policy and public affairs at the SCC.

“Domestically, demand continues to be weakened by tightening household incomes. Consumers are spending less and prioritising expenditure, with the consequences feeding through to both manufacturing and service sectors.”

Mr Clark issued a warning to Scottish politicians to ensure that focus was not distracted from the economic woes of the country by the independence row raging in Holyrood.

“In the midst of the current political debate in Scotland, it is crucial that all our politicians keep their eyes on the economy as the number-one priority,” he said. “2012 will be a vital year for Scottish business and our future prosperity, and it is important to focus strongly on developing the economy.”

Scottish Labour’s finance spokesman, Ken Macintosh, added: “This report, which paints a worryingly bleak picture for Scotland’s economy in 2012, warns of the ‘corrosive effects’ uncertainty is having on our economy. Regardless of the debate about the constitution, the SNP government cannot afford to take its eye off the economy.”

Scottish Liberal Democrat leader Willie Rennie added: “These figures show that it’s imperative that the Scottish and UK governments work in partnership to create the conditions for sustainable growth and jobs.”

Pay increases in 2011 were at historically low levels and well below the rate of inflation, the SCC report revealed, demonstrating real declines in household income.

In the fourth quarter of 2011, pay rises ranged from 1.8 per cent in manufacturing and construction, to 2.5 per cent in retail and 3.5 per cent in tourism.

In a rare ray of optimism, the report said the decline in the number of construction orders had not been as bad as expected – but warned that could be due to damage by the stormy weather at the end of the year.

Fewer than a quarter of firms in the sector increased pay at all in the final three months of 2011, with the average increase coming in at just 1.8 per cent.

An apparent rise in tourism was also offset by heavy discounting – which meant that despite the rise in visitors, spend in restaurants was actually weaker.