Scotland's economy will still trail UK, warns FAI report

SCOTLAND'S economy is unlikely to achieve the Holyrood government's target of parity with UK growth by 2011, according to a new forecast from the revived Fraser of Allander Institute.

Its chief economist Brian Ashcroft forecasts that growth in Scotland will slow this year to 1.9 per cent and slow further to 1.7 per cent in 2009, picking up slightly to 1.8 per cent in 2010 and returning to the 1.9 per cent trend in 2011.

Scottish growth marginally outperforms expected UK growth of 1.8 per cent this year and stays just above UK growth in 2009. But in 2010 it slips behind UK growth again as the UK rate recovers to 2.5 per cent.

With UK growth now predicted to be around 2.6 per cent in 2011, the FAI predicts that " it is unlikely on present information that the Scottish Government's target of parity with UK growth by 2011 will be met."

The conclusion will be a setback for the SNP administration and for the Council of Economic Advisers where First Minister Alex Salmond reiterated his commitment to closing the gap at its meeting last Friday. However, the FAI's appraisal is far from " doom and gloom".

It says that throughout this period net jobs will continue to be created in the Scottish economy, although at fairly low rates, largely driven by the service sector. Unemployment is maintained at below current levels.

It finds that Scottish growth has been on an upward trend since the first quarter of 2005, with quarterly growth averaging 0.61 per cent (UK: 0.69 per cent) compared to an average of 0.47 per cent (UK: 0.68 per cent) between the first quarter of 1998 and the first quarter of 2005.

This trend improvement, it adds, did not occur at the UK level. The big changes, says Ashcroft, "are that the electronics sector looks to have put its problems behind it and manufacturing is outperforming its UK counterpart".

But the latest forecast is a sharp reduction on the 2.3 per cent growth for 2008 predicted by the FAI when it went " off air" last July. The downward lurch reflects the impact of the global credit crunch and sharp rises in the prices of oil and foodst uffs.

"Prospects for the economy in the medium term were considered to be good," said Ashcroft.

"Almost one year later, the comparative certainty of last July has evaporated."

And he warns: "The levels of uncertainty as to future outcomes are very high given present conditions in the world economy. There is a considerable risk that growth and inflation in both Scotland and the UK will be worse than forecast here."

The analysis notes an improvement in growth performance between 2005Q1 and end 2007, evident in both services and manufacturing. But financial services, for a long time a key driver of the Scottish economy, "began to stutter" in the post 2005Q1 period with quarterly growth less than half that in the earlier period.