Page last updated at 00:29 GMT, Sunday, 29 November 2009

Scottish economy headed for 'more pain'

Economic figures
The forecast warns that tough times may continue well into 2010

Scotland's growth will continue to lag behind the rest of the UK's, according to a leading economic think tank.

Ernst & Young's Item Club said there were "disturbing weaknesses" in the Scottish economy and predicted growth of -4.9% this year and 0.7% in 2010.

The forecaster said it expected job cuts to continue, with the unemployment rate reaching as high as 8% next year.

It said the key to growth would be to switch to a more export-led economy, exploiting global markets.

The Ernst & Young Item Club, which uses the same economic model as the Treasury, admitted the recession in Scotland had been even more aggressive than it had anticipated.

Although Scotland has a diverse economy, the senior adviser to the think tank, Dougie Adams, said the service sector would drag down growth.

He said: "The recession has exposed a number of areas where there are disturbing weakness, not least financial services, business services and the hotel and catering sectors, which have all significantly underperformed compared to the rest of the UK."

'Dismal picture'

The financial services sector has performed much worse than the rest of the UK due to fall-out from the banking crisis.

In the year to June output in the sector shrank by 8.4% compared with 0.8% in the wider UK.

Business services also contracted by 8.4% in Scotland and just 6.3% in the UK.

In contrast, manufacturing performed in line with the UK and is expected to be Scotland's fastest growing area of private sector activity in 2010 - with output increasing by 1.5%.

If Scotland's economic recovery is prolonged, the employment shake-out may only have been delayed rather than avoided
Dougie Adams
Item Club senior adviser

The report has predicted further job losses for at least the next two years, particularly in the area of financial services which has seen 4,300 posts lost in the 15 months to June.

This, it said, was less savage than many expected and this sector could see an additional 3,000 jobs go over the next year as bank restructuring continues.

Overall, the Item Club said it expected the unemployment rate to reach 8% in 2010 which is lower than the UK forecast of a rate of 8.6%.

However, Dougie Adams warned this could rise: "There is a real risk that companies may have held on to their employees during the downturn in anticipation that business conditions would improve relatively quickly.

"If Scotland's economic recovery is prolonged, the employment shake-out may only have been delayed rather than avoided."

Export hopes

The report said the key to Scotland's future economic growth would be dependent on a shift towards a more export-led economy, taking advantage of recovering global markets and weak sterling.

However, it warned the fundamental structure of the country's economy would not change dramatically over the next few years but by a slow adjustment.

In its favour, the Item Club said Scotland had a highly educated workforce with skills which would always be attractive to employers and would allow individuals to transfer across sectors as the economy adjusts to new market conditions.



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