Scottish recovery set to trail rest of UK

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Scotland is beginning a slow and patchy recovery from the deep recession of the past 18 months but will continue to underperform the rest of the UK next year, according to a leading economics consultancy.

The forecast by Ernst & Young’s Scottish Item Club came as the minority Scottish National party government prepared to publish its proposals on Monday for a referendum on independence.

The plan is unlikely to be endorsed by Holyrood, however, given the hostility of all the main opposition parties to a referendum, but the SNP insisted that only full powers of fiscal autonomy could end Scotland’s decades of economic underperformance.

Monday’s white paper will set out four different options for Scotland: the status quo; more powers for Holyrood, as put forward by the pro-union Calman commission; full fiscal autonomy; and independence.

However, an opinion poll by Ipsos Mori on Sunday suggested that support for independence has slumped to 20 per cent – the second lowest figure recorded since the SNP came to power in 2007. The opposition parties have urged the Scottish government to concentrate on tackling the recession, rather than pushing for independence.

The Item Club report predicted that “disturbing weaknesses” in the private services sector would drag down the relative performance of Scotland’s economy, which it forecast would shrink 4.9 per cent this year – more than the 4.6 per cent fall it expected in the UK as a whole. The Scottish economy was also forecast to grow just 0.7 per cent in 2010, compared with 1.1 per cent for the UK.

Punching below its weight Performance (%)
Year to June 2009
Financial services-8.4-0.8
Business services-8.4-6.3
GDP growth 2009-4.9-4.6
GDP growth 20100.71.1
Unemployment 20108.08.6

Dougie Adams, senior economic adviser to the Scottish Item Club, said Scotland had a diverse economy and some areas, including crucial parts of the manufacturing sector, were weathering the recession better than in the UK as a whole.

But, he added: “You cannot escape the fact that 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.”

Scotland’s financial services sector has been the biggest underperformer since the onset of the recession, because of the fallout from the banking crisis – in the year to June output in the sector shrank 8.4 per cent, compared with 0.8 per cent in the wider UK.

The picture was just as dismal for business services, also shrinking 8.4 per cent in Scotland compared with 6.3 per cent in the UK. By contrast, manufacturing was performing in line with the UK and was expected to be Scotland’s fastest growing area of private sector activity next year – with output increasing 1.5 per cent.

Job losses in Scotland’s financial services sector have so far been less savage than many expected – 4,300 in the 15 months to June. But the report said the sector could see an extra 3,000 jobs go over the next year as bank restructuring continued.

“Recent announcements by the banks suggest that the process of rationalisation is yet to get into full swing,” Mr Adams said. “However, we remain hopeful that the location of activity by some of the new players in the sector in Scotland will soften the loss of employment from the changes in the banking sector.”

Hywel Ball, Ernst & Young’s managing partner in Scotland, said the past 18 months had been some of the toughest on record for Scotland but it now looked as though the economy might have hit bottom.

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