Scotland’s economic recovery lags rest of UK as it tackles a weak export base and public sector spending cuts, says Scottish ITEM Club
Edinburgh 6 June 2010: Scotland’s economy should start to pick-up in 2011 but will continue to underperform the rest of the UK as it struggles to capitalise on the export led recovery and prepares for savage public sector spending cuts, according to research released today by the Ernst & Young Scottish ITEM Club.
In its summer report, Scottish ITEM Club is predicting GDP growth of just 0.8% this year, with the disappointing figures mainly due to Scotland’s poorly performing export market, retrenchment in the public sector and rising unemployment.
However, in 2011 Scottish GDP should rise to 2.3% and 2.9% in 2012. While the return to growth will not be universal across all sectors – construction and financial services are still on the wane – business services, distribution, hotels and manufacturing are the fastest growing sectors in Scotland, with the latter leading growth in 2011. In the UK, GDP is expected to reach 1% in 2010, 2.7% in 2011 and 3.4% in 2012.
More pain to come
Dougie Adams, senior economic advisor to the Ernst & Young Scottish ITEM Club explains: “Scotland is slowly crawling out of recession and the economic picture is looking a little brighter than it did six months ago. However, while the slow healing process following the global financial crisis is underway, Scotland is not out of the woods yet.
“There is real pain to come in the form of public sector spending cuts and Scotland’s manufacturers and business services industry will need to demonstrate that they have the fire-power to capitalise on weak sterling by increasing exports and overseas income, if we are to return to sustainable growth.”
Exports down 30% in the last decade
According to the report, the volume of Scottish manufactured exports has fallen 30% in the last decade, a performance which Adams describes as “dismal”. This is despite a doubling of world trade volumes over the last 15 years. Exports now account for around 20% of Scotland’s GDP, compared to around 30% for the rest of the UK.
But manufacturing forecast to see fastest growth since mid-1990’s
However, Scottish ITEM says that it is not all doom and gloom. Manufacturing in Scotland is forecast to grow 5% in 2011 – the sector’s best annual growth rate since the mid-1990’s, with activities relating to capital spending likely to perform particularly strongly.
Hywel Ball, Ernst & Young’s managing partner in Scotland adds: “With domestic demand set to remain weak, the export markets provide an ideal opportunity for Scottish companies to expand their customer base. However, corporates need to go in with their eyes wide open. Expansion of any kind throws up logistical and regulatory challenges and requires major investment in people, products, processes and capital. In the current climate, obtaining the necessary capital could prove a major challenge.”
30,000 public sector jobs to be lost in next four years
Scotland‘s second major hurdle is its dependency on the public sector. The public sector has contributed to over 30% of Scotland’s GDP growth over the last 10 years, compared to just 20% in the rest of the UK. Scottish ITEM Club says that the impending squeeze on public sector spending will have a disproportionate impact on Scotland’s economic recovery.
Adams comments: “Although there is scope for productivity and efficiency improvements to be made to Scotland’s public sector, which may help to mitigate some of the impact of future spending cuts, a decline or slow down in public sector output will significantly hamper Scotland’s economic performance over the next few years.”
While the extent of any budgetary cuts remains unclear, recent forecasts suggest that Scotland won’t see a return to 2009 levels of public sector spending before 2020, such is the scale of the retrenchment. This will inevitably have a knock on impact on jobs; Scottish ITEM Club predicts that public sector employment in Scotland will decline by around 30,000 over the next four years.
Jobless recovery for Scotland
However, while public sector jobs are under threat, Scottish ITEM Club is forecasting that overall levels of unemployment in Scotland will peak this year at around 225,000, before dropping back in 2011. Although this represents a greater proportion of the population than in the rest of the UK – 8.6% in Scotland compared to7.8% in the UK – these latest projections are more optimistic than those predicted in November.
Adams says: “In common with the rest of the UK, the rise in unemployment has been more modest than was expected given the depth of the recession, while the stronger growth profile now forecast sees unemployment levels peaking earlier than previously anticipated. It seems that both employers and workers have been keen to embrace flexible working practices, reducing the number of people forced into redundancy.
“The downside of this flexibility is that as the recovery gathers pace businesses may expand output by, for example, increasing the hours of their part time workers, instead of taking on new staff, raising the prospect of a jobless recovery in Scotland.”
Consumers’ continue to curb their appetite
Uncertainty in the jobs market, pressure on disposable incomes from higher prices and tax rises to come will hold back consumer spending growth. The report forecasts a growth rate in consumers’ expenditure lagging well behind GDP growth over the next three years, a sharp contrast to the period running up to the crisis.
Adams explains: “For much of the last decade, consumers’ expenditure in Scotland outstripped GDP, but we are likely to see a reversal of this trend with the shift of UK resources into serving export demand. Scotland’s economic growth will be more dependent on exporting manufacturers than in recent years and in this high productivity sector, faster output growth translates less immediately into new jobs and increased consumers’ expenditure. We may have to wait until 2013 before we see aggregate consumer spending return in Scotland return to 2008 levels.”
Matching UK growth will remain a long term goal
Adams concludes: “Scotland has some structural challenges to overcome and any ambitions of matching the growth rate of the rest of the UK are more of a long-term ambition than a short to medium term reality.
“The economy’s greater dependence on the public sector and the weakening of the Scottish export base in recent years are major handicaps. Much hangs on the extent to which less export orientated manufacturers and companies in the business services sector can improve their export capabilities and exploit the import replacement opportunities thrown up by the lower level of sterling.”
Rosanna Lander