Unemployment set to rise and growth figures cut as Scotland faces a lost decade, according to Scottish ITEM Club

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The EY Scottish ITEM Club has published its 2012 economic forecast, predicting a rise in unemployment figures as Scotland faces up to a 'lost decade' of growth.

  • Employment rate falls as population rises
  • Growth forecast cut by 0.8%
  • Exports continue to lag

5 December 2011: Scotland is not expected to return to peak employment until the early 2020s as the country, plus much of the developed world, endures a grinding recovery, according to a report released today by the EY Scottish ITEM Club.

Scottish ITEM’s winter forecast, which examines Scotland’s future economic prospects, predicts a modest decline in total employment during 2012 followed by sluggish jobs growth until at least 2015.

It believes the employment rate in Scotland will average 71% by that point, a full three percentage points lower than in 2007 reflecting, in part, the expansion of the working-age population by around 85,000 during that time period.

Scotland experiences “eye-watering” losses
Additionally, Scottish ITEM has downgraded its forecast for Scottish growth in 2012 from 1.9% to 1.1% following a year in which the Scottish economy has grown by only 0.6%.

Dougie Adams, senior economic advisor to the EY Scottish ITEM Club, says: “The economic losses are eye-watering. The cumulative loss in GVA to Scotland since the beginning of the financial crisis amounts to around £40 billion. That equates to a £17,000 loss per every household in the country.

“The deterioration in the international environment coupled with continued pressures on household budgets has further dented our expectations for growth in 2012. Any rapid recovery that makes good on losses in relatively short order looks to be a pipe dream.”

Country facing up to a ‘lost decade’ of growth
The report states that the drop in output from the pre-recession peak is greater than initially thought.

“Scotland’s output at the mid-point of this year was around the same size as it was in early 2006,” Adams continues.

“The economy could be expected to grow by 10% over five years in normal economic times, which suggests any talk of a ‘lost decade’ of growth is no longer as fanciful as it once sounded.”

Scotland rebounding at a slower rate than the UK as a whole
The report also notes that the rebound in Scotland has been weaker than that of the UK as a whole. Growth north of the Border totalled 1.4% in the past two years, compared with 2.8% across the whole of the UK. Scotland’s economy barely grew in the past year alone, with output increasing by only 0.2% between mid-2010 and mid-2011.

Scottish ITEM attributes more sluggish growth in the recovery to the weak performance of transport and communication, business services and Scotland’s public sector. Manufacturing is shown to have grown by 4.8% in the two years to mid-2011, but this compares with an increase of 6.6% in the rest of the UK.

Output in the key business services sector, which accounts for a quarter of private sector economic activity in Scotland, remains 9% below its peak pre-recession level having grown just 2% from its low point in the third quarter of 2009.

Export performance continues to lag
Furthermore, the report suggests that Scotland’s overall international export performance continues to lag. World trade in goods has expanded by around a quarter since the recovery began in 2009, but data shows an increase of only 7% in Scottish manufactured goods and exports.

Food and drink exports are shown to be up by 10%, with the metals and pulp, paper, publishing & printing sectors both having grown by 27% in the last two years. Despite the buoyancy of survey data, the official series show engineering export volumes dropping by 5% since the recovery began.

As for the UK as a whole, the Eurozone remains a key market for Scotland, accounting for around 40% of Scottish exports.

Jim Bishop, senior partner at EY in Scotland, says: ““The continued Eurozone crisis underlines just how important it is for Scotland to diversify its export efforts to high-growth countries. We need to capitalise on the booming success of the BRIC markets and also look beyond the curve to other high-growth countries such as Indonesia, Mexico and Turkey.”

Can Scotland rise to the challenge, or will it be blown off course?
The report concludes by stating that even the most modest prospects can be “blown off course” by international developments with events in the Eurozone, where the break-up of the currency zone now appears a real possibility.

Dougie Adams says: “Our growth forecast is predicated on the Eurozone finding some kind of route out of its current morass, albeit with the Mediterranean members mired in a cycle of pernicious austerity and low growth.

“Default by either Italy or Spain would push Europe and the UK, and possibly the rest of the world as a whole, back into the recession or worse.”

Adams also highlights the impact the economic malaise is having on long-term growth potential.

“Long spells of unemployment erode workers’ skills while postponing investment hits future productivity and growth hard,” he says.

“There are also questions over the relevance of Scotland’s existing skills and business base; can businesses and people rise to the significant challenges of finding foreign customers in a world where traditional markets are characterised by weak demand? In Scotland’s case we have long argued that much depends on the ability of key areas of the business services sector to find and nurture new markets. So far, the progress has been slow,” he concludes.

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