Scots economy at its best for three years

The Lloyds TSB Scotland Business Monitor suggested that Scotland's economy is "slowly strengthening" and recorded a 2 per cent net increase in turnover for firms in the last quarter.

It comes in the same week as unemployment figures dropped in Scotland for the seventh month in a row.

The rosier view for the Scottish economy emerged as other figures suggested hard times across the UK as a whole, particularly in the retail sector.

New Office for National Statistics figures showed a surprise 1.4 per cent monthly drop in sales volumes across the retail sector with food stores among the worst hit, slumping more than 3 per cent over the past year.

However, there was some optimism for the UK economy in another Lloyds survey which showed that spending power appears to be up 4.4 per cent.

While the SNP took the results as an endorsement of the Scottish Government's economic strategy, it said that it still needed further powers on corporation tax, excise duty, borrowing and control of the Crown Estates to boost the Scottish economy further.

The UK Government has stated it only intends to increase borrowing powers up to 12 billion.

The Lloyds TSB survey showed that for the three months to May, 33 per cent of Scots firms increased their turnover, 36 per cent had "static" turnover and 31 per cent reported a fall in business.

The results are in stark contrast to the previous quarter's results which were coloured by the bad winter weather. These showed that just under half - 45 per cent - had seen a drop in turnover, while only a quarter of firms reported an increase and 30 per cent experienced static turnover.

The new figures show a net increase in turnover of 2 per cent, but in the previous three months turnover was down 20 per cent and in the three months to May in 2010 it fell 7 per cent.

Donald MacRae, the bank's chief economist in Scotland, said: "These are the most positive business monitor results in three years and contrast sharply with the previous quarter which was badly affected by the severe winter weather conditions.

"Our economy is slowly strengthening as company turnovers increase and the employment situation improves. However, the economy remains fragile as consumer spending is constrained by low confidence as a result of rising inflation which is squeezing disposable incomes."

Of the 408 firms surveyed, 31 per cent hoped to increase turnover over the next six months.

Both production and service sectors grew in the three months to May, especially manufacturing production.

The bank survey shows that economic growth in Scotland began to slow in the second half of 2008. At the end of that year, the survey recorded its worst reading for economic growth, although it showed slight improvement until early 2010.

Small signs of recovery were notable in the middle of 2010 but this fell away in early 2011.

The latest results reflected a growing sense of optimism from organisations which represent businesses in Scotland. David Watt, director of the Institute of Directors in Scotland, said that the survey supported the feedback he is receiving from businesses.

He said: "I think that we are seeing an upturn in Scotland and that the businesses which have come through the tough times are lean and fit and are doing some healthy business."

He suggested that the previous quarter's gloomy results had more to do with the unusually harsh winter conditions which hit the retail sector.

He added: "As a note of caution I would say this is just one set of results and I would like to see some longer-term evidence before I agree we have properly turned the corner. However, there is an air of optimism in Scotland at the moment."

The report was used as further ammunition by the Scottish Government to press for its six demands on more powers for the Scottish Parliament.

A spokesman for finance secretary John Swinney said: "This is further evidence of recovery in Scotland - in the same week as the seventh consecutive reported fall in unemployment.

"But while we welcome these trends, there can be no grounds for complacency and more needs to be done to support jobs, secure investment and boost economic activity across Scotland. "That is why the Scottish Government is seeking new job-creating powers in the Scotland Bill, so that we can do more to support economic recovery."

There was also some good news from Lloyds for the future of the UK economy with another survey revealing that most consumers now believe their spending power has increased.

Year-on-year spending power was up by 4.4 per cent, more than reversing the 0.3 per cent dip in April, and continuing the trend seen in the first quarter of the year.

Earnings growth was the main factor driving the improvement, with people's incomes an average of 3.9 per cent higher than they had been in May last year, more than offsetting the 2.3 per cent hike in the cost of essential goods and services.

Patrick Foley, chief economist at Lloyds TSB, said: "Looking beyond the April data that has been affected by the timing of holidays, growth in spending power appears to be back in line with the improving trend seen since the beginning of the year."

About 43 per cent of people still said money was tight, despite the increase in pay seen in the past year.

Half of people also said their finances were bad, while 65 per cent are spending at least three-quarters of their income on essentials.

At the same time 21 per cent said they would have to use savings or credit cards to make ends meet. But people are feeling more upbeat about the state of the economy and the employment situation.

The bank said that May was the first month in which spending power had risen above the rate of inflation since mid-2010.