New economic horizon or false dawn

Fraser of Allander Institute’s economic commentary reveals the Scottish economy will contract significantly this year and the recovery is likely to be slower than the UK economy.

With current data suggesting that the UK recession may have bottomed out as early as March 2009, and some signs of positive growth predicted for April and May, businesses could be forgiven for thinking that the worst of the recession was behind them.

There is a developing view that the UK may move out of recession and experience growth in 2010 on the background of a favourable exchange rate and the benefits of the significant monetary and fiscal policy interventions but, as the Governor of the Bank of England has noted, this recovery may be slow and protracted.

However, the evidence for Scotland is less clear, but the Institute expects there will be a significant contraction this year. Whilst we forecast that the Scottish economy will perform better than the UK in 2009, we believe that it is more likely that the Scottish recovery will be slower than that of the UK.

Professor of Economics at the University of Strathclyde, Brian Ashcroft said:

“It is likely the recession may have bottomed out, but what is unclear is the timing of the recovery. Credit availability in the medium term remains uncertain and unemployment will continue to rise in the medium term. The adjustments required to ensure a favourable long-term recovery pose a challenge to Scottish government policy as well as to the private sector in Scotland.”

Over the last decade Scotland had evolved into a more service sector based economy and more reliant on domestic demand. Future growth may depend more on exports and external demand. The Scottish economy may therefore experience difficulties in adjusting to a situation of higher household savings, lower domestic consumption growth, possible higher taxation, and severe cutbacks in public spending.

Paul Brewer, senior partner of PricewaterhouseCoopers LLP’s Edinburgh office added:

“There are some signs that confidence is slowly re emerging in the corporate sector, but the economic contraction over the past nine months has been particularly severe in a number of sectors.

“Looking to the future we can expect lower domestic demand and cuts in public sector expenditure

in the medium term which poses both a challenge to Scotland in improving its performance in manufacturing and exports and a risk that failure to meet these challenges will mean further job cuts..

“As predicted in our February Business Review, the refinancing of corporate debt over the next three to four years continues to be of concern. Already this week we have seen a national transport company being forced to revert to tighter lending limits as it tries to resolve the issues caused by its £1.2bn debt. And with little evidence from Scottish companies that they feel any benefit of increased credit in the economy it looks like this will continue to act as a drag on recovery as wider economic conditions improve.”

Contact details
Email: Lynn Hunter
Tel: +44 (0)141 355 4015