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Growth forecasts revised downward

Scotland may fall into recession after Brexit vote

Brian AshcroftScotland is in danger of sliding into recession and its economy may be seriously damaged by a vote to leave the European Union, says a new report.

Slow investment, weakening exports and the continuing impact of the low oil price have forced a key economic research unit to downgrade its forecasts for the Scottish economy.

The Fraser of Allander Institute says Scottish GDP growth this year will be 1.4% (down from earlier 1.9% forecast), rising to 1.9% in 2017, and 2% in 2018.

Growth in the Scottish economy has weakened since the Institute last reported in March 2016. After GDP data revisions it says the Scottish economy came perilously close to a recession in 2015.

Despite the slight upturn in the fourth quarter it may fail to avoid a recession in the coming months, it says in its latest quarterly report, its last produced with PwC.

Scotland, it says, “is now relying solely on the service sector for growth” as the contribution of construction, driven by infrastructure spending, has now peaked, albeit at a high level of activity.

Brian Ashcroft (pictured), emeritus professor of economics at the University of Strathclyde, said: “The Scottish economy came within a hair’s breadth of recession last year and with little improvement recently may fail to avoid a recession in the coming months”

On Brexit, the report says there is a high probability that output and growth in the Scottish economy will be damaged if the United Kingdom votes to leave the EU.

First, the likelihood would be that trading arrangements would be less favourable than in the EU. Not only would actual and potential Scottish exporters have to overcome a potentially weaker competitive position due to lower labour and total factor productivity, they may also have to face the additional hurdle of less favourable trading arrangements.

Secondly, uncertainty attaching to a Brexit and the terms of any subsequent arrangements might worsen Scottish productivity growth through the negative effects on trade competition, inward investment and financial integration.

Prof Ashcroft said:At a time when there is increasing policy concern about Scotland’s productivity and growth performance a vote to leave the EU would place an unnecessary burden on Scottish companies and economic policy.”

Slight negative growth in the production sector meant that the recession in the sector continued with negative growth having occurred in three successive quarters.

Within production, manufacturing technically emerged from recession in the fourth quarter but the authors say manufacturing growth “can only be described as weak”.

It adds: “Moreover, even though the service sector registered growth of 0.3% in the final quarter of last year, UK services grew three times faster and performance in all principal private sub sectors in Scotland is appreciably weaker than their UK counterparts.

“Financial services are especially weak and the weakness of business services growth has been exacerbated by the effects of the fall in the price of oil.”

Conditions in the Scottish labour market have deteriorated significantly as the job shedding associated with the consequences of the oil price fall and deteriorating export performance begin to bite. In the quarter to March 2016 the numbers in work fell by 53,000 (-2.0%).

The last time there was a fall in jobs of this scale was back in early 2010. Unemployment rose by 8,000 (+4.8%) to 169,000 with the rate rising to 6.2%, compared to 5.1% in the UK, a gap that is now the largest since mid-2004.

Paul BrewerPaul Brewer (right), government and public sector partner, PwC in Scotland, said: “While Scotland has edged away from recession in the fourth quarter, the data suggest that for some sectors Scotland is flirting with recession and, in areas of growth, is struggling to grow at a pace comparable to the rest of the UK.

“This has been a difficult trading environment for businesses to operate in and for investors to plan between the oil price, the upcoming European referendum uncertainties and the general tightening of belts in many sectors.”

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