Scottish ITEM Club forecast 2013

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Production-per-head to remain below pre-crisis levels until 2016

Scotland’s overall output decline of 4% over the past four years puts it on a par with the troubled Spanish economy, according to the latest EY Scottish ITEM Club report.

Its winter forecast states that 2012 will be the third year in five in which the Scottish economy shrank, and predicts growth of just 0.7% in 2013. This, it is noted, is “well below normal” and lags the expected UK figure of 1.2%.

Dougie Adams, senior adviser to the EY Scottish ITEM Club, said: “Slight growth should be generated in Scotland next year, so long as the worst fears over the eurozone and US budget prove overblown.

“However, the point at which the economy regains its past peak has been pushed beyond 2014. Taking account of Scotland’s increasing population, it will be at least 2016 before output-per-head surpasses pre-crisis levels.

“While growth has been hard to find in the developed world of late, Scotland and the UK are in the unenviable set of economies that are still producing less than they did at the outset of the financial crisis.

“In addition to Spain, Scotland’s performance is close to that of two of the Scandinavian economies – Denmark and Finland – that are often used as comparators. In contrast, Sweden and Norway are among the strongest performers in the period, with Switzerland and Germany leading the way with 2-3% growth.”

Exports key to revival

According to the forecast, Scotland is uncomfortably far down the export rankings, trailing a number of eurozone countries with well-recognised competitiveness problems.

This, it states, “underlines the challenges faced by an economy that is going to be heavily reliant on exploiting external demand for growth in the foreseeable future”.

Jim Bishop, Scotland senior partner at EY, said: “In times of economic struggle, the real success stories involve those businesses that have continued to invest in and fully exploit the opportunities presented by the global marketplace.

“Developing investment plans, recruiting the right local talent and maintaining ongoing involvement and oversight of the entire process remain the keys to success. The emerging markets haven’t proven to be bullet-proof, but they still offer openings while the domestic economy remains stagnant.”

Growth in Services and Manufacturing provides chink of light

The report notes that Scotland’s economy is 4.4% smaller than in early 2008, marginally worse than the UK as a whole.

At sector level, Scotland had outperformed the rest of the UK in Business & Financial Services & Finance by mid-2012, but performance has been poorer in three other heavyweight areas – the Public Sector, Construction and Transport & Communication.

Adams said: “The stronger performance of the combined business and financial services sectors over the year to the middle of 2012, with output up 4.7% compared with 1.3% for the UK as a whole, makes up some of the ground the Scottish sector has lost relative to the UK in the post-crisis period.

“As we have stressed in previous reports, the performance of business services is crucial to the nation’s long-term economic health. Its strong performance over the past year can be viewed as one positive signal, particularly when some of it domestically orientated sub-segments remain under severe pressure.”

Jim Bishop, added: “It is heartening to see the strong performance of the wider business services sector over the last year.  This suggests that Scottish businesses selling specialist services are finding growth markets within a flat economy.  This bodes well for high quality jobs and the spin-offs that go with them.”

Private Sector job increases to balance Public Sector losses

The forecast for 2013 and beyond sees the familiar growth gap between Scotland and the UK as a whole widen further, with predicted UK growth of 1.2% and 2.4% in 2013 and 2014 in the UK respectively, compared with Scottish growth of 0.7% and 1.8%.

The Scottish economy is forecast to add 11,000 jobs in 2013, an increase of 0.4%. Growth in employment is then expected to continue into the medium term with net employment growth of 14,000 in 2014 and 20,000 in 2015.

This, it is noted, leaves the employment rate relative to the working-age population only marginally above its current value of 71.4%, well below 2008’s peak of 74.5%. This underlines the challenge faced in seeking to reform the welfare system by moving significant numbers of current benefit recipients back into jobs.

Adams added: “The Business Services sector is expected to account for much of the growth in jobs, accompanied by a small pick-up in construction employment.

The Private Sector will drive jobs in the long term, with the Public Sector continuing to shed jobs. In fact, the forecast shows 25,000 fewer public sector jobs in Scotland by 2015; a total shrinkage of 60,000 since 2008.”

Impact of austerity programme is major uncertainty

The impact of the measures designed to control the UK’s public sector deficit is identified by the report as the one of the main uncertainties to the forecast, alongside the extent to which underlying credit conditions are improving and the impact on mobile investment to Scotland of a range of factors such as the potential for change in the relationship between the UK and the EU.

Adams concluded: “The listed risks aren’t necessarily all on the downside, raising the chances that the worst of the post-crisis phase lies behind us. But, it’s undisputable that Scotland is facing an extended period of convalescence.”

Read ITEM's 2013 Scottish forecast 5.2Mb, November 2012