Slump in GDP raises fears of a slide back into recession

SCOTLAND's economy shrank in the last three months of 2010, mirroring the trend in the rest of the UK and raising fears that the country could fall into a second recession.

Gross domestic product (GDP) fell by 0.4 per cent in the period, dragged down by the construction sector, which reported a drop in productivity of 2 per cent - and the severe winter weather, which saw the country grind to a halt and many business forced to close.

The slump was slightly better than the 0.5 per cent shrinkage experienced by the UK over the same period.

But if GDP falls again in the first quarter of 2011 - creating two consecutive months of shrinkage - Scotland will officially return to recession. The last time Scottish GDP was in negative growth was the first quarter of last year - when the economy was still deep in the recession sparked by the global banking crisis.

Separate figures published yesterday by the Accountant in Bankruptcy showed that the number of personal insolvencies fell again in the first quarter to 4,262, down 7 per cent on pre-Christmas levels - but the number of failed companies shot up by 11 per cent over the period, to 294.

The construction sector claimed yesterday that the situation was far worse than the Scottish Government figures suggested and called for politicians to come up with a plan to kick-start the flagging industry.

Figures for the full 12 months to the end of 2010 showed an 11 per cent rise the gross value of the sector compared with the previous year.

The Scottish Building Federation says the new GDP figures bear little relation to the "real world", pointing to the 6,000 Scottish construction jobs lost over the final quarter.

"I find it very hard to reconcile these latest GDP figures with the reality many construction firms are facing," said SBF chief executive Michael Levack. "Private sector construction still has a mountain to climb to get back to anywhere near the rates of output it was showing two years ago - and with budgets being slashed, public contracts are drying up fast.

"Politicians campaigning in advance of next month's Scottish election please take note: Scotland's construction industry continues to need your understanding and support - and a clear plan of action to set the sector and the Scottish economy as a whole on the path to sustainable recovery."

Experts said the weather at the end of last year was responsible for only part of the decline.

"The recovery was always likely to be bumpy, which makes it all the more important that the next Scottish Government prioritises policies that promote trade, investment and commercial innovation," said CBI Scotland director Iain McMillan.He added that he expected Scotland to lag behind the rest of the UK this year due to its large public sector.

"If there is a contraction in GDP in the first quarter of 2011, that would mean a technical recession for Scotland," he said.

Dr Esmond Birnie, chief economist in Scotland for PricewaterhouseCooper, said the country had been hard hit by the further construction sector slowdown, but it was too early to predict a double-dip recession.

"The economic recovery in Scotland appears to be faltering after the initial strong bounce-back and we anticipate that 2011 will be a difficult year," he said. "But we do not expect the recovery to completely stall."