Scottish recession 'not as deep'

Scotland's economy will retract next year, the report pedicted

Scotland is about to enter its worst recession since 1980, but will still fare better than the rest of the UK, economists have predicted.

The study by the Ernst & Young Scottish ITEM Club said Scotland's GDP was likely to contract by 0.4% in 2009.

But it said this would be significantly better than elsewhere in the UK, where there will be a fall in output of 1%.

However, the report warned that Scottish unemployment would rise to levels last seen in the late 1990s.

The ITEM Club - which uses the treasury's own economic model to make forecasts - expects Scotland to outstrip UK growth in 2010, before falling back in 2011 as the UK gathers strength.

The economy must face a future with a changed landscape for its previously buoyant banking sector Dougie Adams Economic advisor

In 2010, Scottish growth could recover to 1.5% - compared to 1.0% growth for the UK - as the impact of lower interest rates, fiscal stimuli and sharp falls in inflation and competitiveness gains from a lower pound feed through to the economy.

It said that the impact of the short-term recession on the labour market will be substantial, with unemployment rising sharply by 50,000 to 124,000, or 4.4%.

The previously fast-growing private services sector will account for approx 20,000 of these job losses, it claimed. Construction employment will decline by 7,000 or 6.2%, while the long-term erosion of jobs from manufacturing will continue, with a further 11,000 jobs going by 2010.

Dougie Adams, economic advisor to the ITEM Club, said "Scotland has accepted that a recession is now inevitable. The economy must face a future with a changed landscape for its previously buoyant banking sector.

"A number of factors hold the key behind recovery. These include policy actions at a global and UK level, including any fiscal measures announced in the pre-Budget report, and the fall in oil and commodity prices.

"The sharp decline in inflation that is in the pipeline will buoy disposable incomes and leaves an open door to further interest rate cuts. Finally, the UK will also benefit from the sharp fall in sterling that is unlikely to be frittered away by wage inflation.

"However, recovery critically depends on both the willingness of the banking system to extend credit and the readiness of businesses and consumers to use it."

'Crisis in confidence'

Mr Adams said that consumer expenditure was predicted to fall by 1% in 2009, with the Scottish high street continuing to suffer for some time.

And although Scotland has a less exposed housing market compared to the rest of the UK, Mr Adams said he believed it is likely to see very low transaction volumes and falling prices for some time to come.

He added: "The housing sector's stressed state will have clear implications for the construction industry and household goods' retailers.

"There is also the issue of how falls in housing wealth, combined with the sharp setback in equity markets, will influence consumers' behaviours.

"A further crisis in confidence, and the unprecedented nature of the current turmoil, could bring a sharper and more pronounced increase in savings by households, knocking activity across the economy."