Fraser of Allander report: new risk of recession for Scotland
There is a new risk of recession in Scotland as the economy continues to weaken and the Eurozone crisis worsens, according to the latest Economic Commentary from the Fraser of Allander Institute at Strathclyde which is sponsored by PricewaterhouseCoopers (PwC).
Growth in the global economy weakened in the middle of the year, the UK economy stagnated over the past year and growth in the Scottish economy is little different.
Despite measures being put in place to deal with the wide range of shocks to the global and European economies, such as a second bout of quantitative easing in the UK this autumn, it is anticipated that Scotland will only grow (GVA) by 0.4% in 2011 – half the central forecast figure in June 2011 – growing to 0.9% in 2012 (downgraded from 1.5% in the summer).
In short, Scottish GDP is still 4% below and the UK 5% below its pre-recession peak. The US, in contrast, attained its pre-recession GDP peak in the third quarter of this year.
Positive jobs growth over the past year in Scotland offers little comfort in a labour market that is more than 3% below its pre-recession jobs peak, compared to 1.5% in the UK. Full-time working is falling and labour market inequality is rising especially to the disadvantage of young people.
Brian Ashcroft, professor of economics at Strathclyde Business School, said, "Sadly, the weakening in the global economy that we feared in June has come to pass, leading us to halve our forecast for Scottish GDP growth this year. Our central forecast is for growth to continue, just. But the avoidance of recession as the crisis in the Eurozone deteriorates is becoming less and less likely.
"It is a tragedy that the Eurozone crisis, which threatens the well-being of the whole global economy, is worsening when clear policy solutions exist. That they are not being adopted is due to national hubris and policy error on a giant scale."
The business and financial services sectors, which account for 26% of overall Scottish GDP, have been significantly impacted by the recession and the markets and banks are desperately seeking greater certainty. According to Lindsay Gardiner, head of assurance services at PwC in Scotland, until the Greek problem is resolved, the medium-term funding markets for banks are likely to remain frozen. He says, "The financial services industry is a major driver in Scotland's economic engine, so any slowdown in the pace of growth is concerning. A combination of ongoing uncertainty of Eurozone contagion, potentially worsening banks' balance sheets, volatility in the global debt markets and continued concern over the level of regulation is having a massive impact on financial results and overall confidence.
"The recent Q3 results of life insurers and asset managers, which are generally below market forecasts, clearly demonstrates this.
"Uncertainty can also stifle job creation. While overall employment figures for Scotland may appear better than for the rest of the UK at the moment, we still expect to see further job losses in the public sector as the full impact of the spending review is felt. The private sector is not immune either; as the financial services industry continues to negotiate the challenges that lie ahead we are likely to see a freeze on recruitment in the short to medium term and even job losses.
"Perhaps the biggest economic impact, however, is on enterprise. After all, when a business is looking to expand, availability of finance can make the difference between success and failure and while some businesses have increased their cash reserves, the reluctance of banks to lend is still a major concern, particularly within the private business sector.
"The chancellor's proposal for a credit easing scheme may help, but much will depend on the level of finance available and scheme details, including ease of access and the cost to the borrower."
