The Scottish economy continues to recover from recession but is threatened with stagnation as the rate of recovery slows, according to the latest Economic Commentary from the University of Strathclyde's Fraser of Allander Institute, sponsored by PwC.
Almost three years after the start of the recession the Scottish economy has only recovered about a quarter of the output lost, while the UK economy has recovered a third of lost output. The main hopes for recovery, exports and business investment are recovering slowly or fairly static while household spending is weighed down by debt overhang and declining real incomes.
Brian Ashcroft, Professor of Economics at the University of Strathclyde, said: "We are teetering on the brink of what could be a considerable period of stagnation. We have to hope that the forces driving recovery secure the upper hand against the pressures fuelling stagnation, including public spending cutbacks, falling real household incomes, rising energy prices and the spectre of a fragmenting eurozone."
He added: "With the weaker growth of household spending in Scotland, greater fiscal consolidation in 2011 and a sluggish outlook for private sector investment, I find it hard to see how the Scottish economy can continue to track the UK economy as it has done in recent quarters."
The Institute has shaded down its forecasts for 2011, by 0.2% points, and for 2012, by 0.1% points, compared to the March release. The lowering of the forecast reflects the weakening in the economy that has been observed in recent months. Household spending is being hit by the debt overhang, the decline in real disposable incomes as inflation moves further ahead of earnings, and uncertainties about job prospects as the fiscal consolidation starts to bite, especially in Scotland, and the economy slows. In addition, the export and investment recovery is weaker than earlier hoped.
Paul Brewer, senior partner at PwC in Edinburgh, said: "With the Scottish Government delaying the full impact of the spending cuts, beleaguered public sector organisations have had some much-needed breathing space to deal with the funding shortfalls. But time has run out. Now the public sector must start to implement the hard decisions that will determine the quality and shape of service delivery.
"As Scotland confronts the reality of these hard choices, it is vital that Holyrood and local authorities keep citizens engaged and informed. With strong leadership and open and effective communication, it is much more likely that people will understand of the tough issues and give Holyrood and local authorities the 'permission' to make the hard choices that will impact them personally."
Paul Brewer, senior partner at PwC in Edinburgh, added: "Tackling lacklustre growth and driving economic recovery is a priority for the Scottish Government. Public sector investment has a key part to play though the proposed step-up in investment will arrive late in the day. Earlier this month the UK Government also agreed in principle to Holyrood issuing bonds to raise new funds from capital markets.
"However, this increased fiscal freedom is not without risks. Today, the eyes of the financial world are on Greece, where the impact of a potential default on its sovereign debt will have repercussions well beyond the Eurozone and the global financial community. For Scotland, the question would be who in the financial world would buy new bonds from Scotland and at what price?"