It’s a slow grind from here – Scottish ITEM Club Scotland faces a long wait before economic recovery, as unemployment continues to rise
Edinburgh 8 June 2009: Scotland will continue to suffer from the impact of the global economic downturn until 2017, despite having already shown the first tentative signs of stability and improving business confidence, according to research released today by the Ernst & Young Scottish ITEM Club.
In its summer update report, the Scottish ITEM Club has predicted that the Scottish economy will contract by 3.1% in 2009, followed by a year of stagnation in 2010, and rising GDP in 2011. However, only by 2017 will employment in Scotland reach the same levels achieved in 2008.
Dougie Adams, Economic Advisor to the Ernst & Young Scottish ITEM Club, comments: “Whilst there have been some early signs that the Scottish economy is beginning to stabilise, like the rest of the UK, the patient is still a long way from recovery and there is more pain to come in the form of significant job losses.
“Scotland faces a further weakening of the labour market and a sharp rise in unemployment over the next two years, whilst the impact on jobs of the inevitable cost cutting at the banks adds to the general uncertainty.
“It is going to be a lengthy rehabilitation process, even when GDP moves into positive figures”, he adds.
Scotland has turned a corner
According to the report, the performance of the Scottish economy has closely resembled the rest of the UK over the last nine months and has not been sheltered from the worst effects of the credit crunch. Both economies have been hit hard by the collapse in world trade and the difficulties in accessing credit, but in its latest forecast the Scottish ITEM Club is cautiously optimistic that a corner has been turned.
Adams explains: “Since March there have been several indications that the unprecedented fiscal stimulus packages introduced by governments across the globe are beginning to have an impact; business surveys, confidence measures and even lending criteria have begun to stabilise, whilst the rate of decline in manufacturing output also appears to be easing.
“Nevertheless, the short term outlook is still one of negative growth and the labour market remains extremely weak.”
Unemployment set to rise
The current economic crisis is expected to cast a long shadow over Scotland’s labour market, with job losses forecast to continue until 2011 and unemployment peaking at over 230,000.
The report indicates that the recovery of the labour market will be a slow process, and periods of extended unemployment often mean loss of job-related skills. Wage setting mechanisms may also make it increasingly difficult for some unemployed workers to price themselves back into work.
On the upside, not all parts of Scotland are suffering equally from the rise in unemployment. Scotland’s cities appear to be faring better than the less urban parts of the central lowlands. Lanarkshire and Livingston & Bathgate for example have experienced a sharp rise in unemployment rates - 2.5 and 2.3 percentage points respectively - whereas Glasgow, Edinburgh and Aberdeen have lower increases of between 1.7 – 0.7%.
The business services sector is likely to play a crucial role in the eventual recovery of Scotland’s labour market. The report forecasts that the business services industry will have recovered over 44,000 jobs that are expected to be lost in the downturn by 2014, and will generate a further 50,000 jobs by 2019.
Adams comments: “With barely any employment increases anticipated from the financial services sub-sector, this growth will be dependent on continued trends towards specialisation and the ability of the business services sector to penetrate markets beyond Scotland.”
Tourism only a small offset for the retail and hotel sectors
Rising unemployment and waning levels of confidence, will see consumer expenditure curbed by 3% this year, and by nearly a further 1% in 2010, according to the report. This is having a substantial knock-on effect on retailers, hoteliers and restaurateurs, and output in the sector is expected to shrink by 5.0% this year and 0.7% next year.
Adams comments: “While the weak pound may be increasing the number of European accents in Scotland’s tourist hot spots and attracting UK visitors who would otherwise have gone abroad, the impact is negated by the generalised weakness in consumers’ expenditure.
“We are expecting Scotland’s retail-related and hotel sector to have shed in the region of 30,000 jobs, between 2008 and 2011.”
Housing market suffering in the storm
Like the rest of the UK, Scotland’s housing market has fallen victim to tightening credit conditions and declining consumer confidence. Scottish house prices are down by around14% from their peak in the second half of 2007, and Adams expects worse to come.
He comments: “This year, across the UK, house prices are likely to decline by 17% from 2007, and fall by an additional 5% in 2010.
“There is however some good news. Better affordability will offer some protection to the Scottish market.”
Potential downside risks could mean weaker forecast
Adams continues by explaining that there are a number of factors or risks to the current forecast that could result in a worse than predicted scenario for Scotland, particularly around the potential impact of long term cost cutting by the public sector.
He comments: “Scotland would be relatively vulnerable to an approach that pressures the budgets for public service – a sector that contributes to over 22% of Scotland’s economy and employs almost 30% of the workforce.”
Scotland’s financial services sector needs to be bolster its defences
The outlook for Scotland’s financial services sector is also far from certain according to the report, even though the second half of 2008 saw a larger rise in activity in Scotland (2.2%) than elsewhere in the UK (0.8%).
Adams explains: “On the plus side much of what Scotland does in banking is the essential plumbing of the system which, combined with the human skills available and already lean operations, may mean that the job losses are less severe than in some of the more exposed areas of the City.
“Nevertheless, the surgery required to return the Scottish based banks to long-term viability may be deep and long-lasting, with non-Scottish competitors potentially gaining substantial UK market share as the economy recovers.”
Concluding Adams comments: “There can be little doubt that Scotland will need to fight hard to maintain its position as a financial services centre.”
Future for Scottish businesses?
With the fallout from the economic downturn set to last until 2017, it is clear that the challenges for Scottish businesses are far from over.
Hywel Ball, Ernst & Young’s Managing partner in Scotland, said, “However, it is important to remember that a period of crisis can also provide opportunities, and will often drive change more rapidly and effectively than a period of prosperity.
“During this time of unprecedented volatility companies must not lose sight of the opportunities that come with a changing landscape. Those who give themselves a thorough health examination, are bold and make long-term calculated decisions will recover more quickly than others and will be better placed to make the most of the eventual upturn”, concludes Ball.