Ernst & Young Item Club says decline in Scotland's economy like Spain's

sterling coins and note The report said Scotland's economy is unlikely to fully recover until 2016

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The decline in Scotland's economy is similar to that of Spain, according to a global accountancy firm.

A report by Ernst & Young said Scotland's overall output decline of 4% over the past four years put it on par with the troubled Spanish economy.

This will be the third year in five in which the economy shrank.

The report predicted growth of just 0.7% next year - which it said was "well below normal" and lower than the expected UK figure of 1.2%.

Ernst & Young also found that Scotland's economy remained in an "unenviable" position, with exports "uncomfortably" low in the world rankings.

And the country faces "an extended period of convalescence" ahead, it stated.

The firm estimated that 60,000 jobs will have been shed in the Scottish public sector between the start of the 2008 financial crisis and the end of its forecast in 2015.

Start Quote

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”

End Quote Dougie Adams Ernst & Young

It has advised that there is an element of uncertainty in its forecast, largely around the impact of the UK government's austerity measures, the extent of the improvement in the credit market, the potential for change in the relationship between the UK and the EU, and the uncertainties inherent in the Scottish referendum.

Senior adviser Dougie Adams said: "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 indisputable that Scotland is facing an extended period of convalescence."

He added: "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."

Comparisons by the Item Club of economists are a bit unfair, or at least misleading. There are big differences.

For all its problems, Scotland's banking sector is not in the parlous state of Spain's.

Using sterling, it has the escape route of devaluation against its main trading partners.

And its unemployment problems are nowhere close to the severe problems afflicting Iberia.

But with three years of contraction out of the past five, the downturn still leaves Scotland with a lot of catching up with the output per head it achieved before 2008, and now looking to 2016 before it does so.

Scotland's economy is not expected to make a full recovery until 2016.

Performance has been poor in the public sector, construction and transport and communication, described as three "heavyweights" of the Scottish economy.

A separate report, meanwhile, has suggested the engineering sector in Scotland appears to have weathered the economic downturn which threatened to disrupt it in the third quarter of this year.

The latest review from Scottish Engineering, the support group for the industry, said orders and output have both improved and staffing levels are being maintained.

'Unhelpful and inappropriate'

Ernst & Young's Item (Independent Treasury Economic Model) report found a "chink of light" in the more encouraging performance of the service and manufacturing sectors, while financial services outperformed the rest of the UK.

Jobs are continuing to move from the public to the private sector, with the 25,000 jobs predicted to go in the public sector by 2015 almost balanced by the 20,000 expected to be created in the private sector.

Start Quote

It is time for the Chancellor to give an immediate targeted boost to capital investment as part of this week's autumn budget statement ”

End Quote Spokesman Scottish government

However, this will leave the employment rate only marginally above its current value of 71.4%, well below 2008's peak of 74.5%.

The report states: "This underlines the challenge faced in seeking to reform the welfare system by moving significant numbers of current benefit recipients back into jobs."

Mr 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."

The Scottish government said the report was the latest in a long line of reports raising concerns over the impact of the UK's deficit reduction plans on the economy.

A spokesman said: "With UK government measures to cut the UK's public sector deficit identified by the report as one of the main causes of uncertainty, it is time for the Chancellor to give an immediate targeted boost to capital investment as part of this week's autumn budget statement and to help protect the recovery in the short term and provide the infrastructure necessary to support economic growth in the long term.

"Comparisons with Spain are unhelpful and inappropriate. Unemployment in Spain is over 25% with youth unemployment over 50%, whilst in Scotland unemployment over the latest period (Jul-Sep) was 8.1% with a youth unemployment rate of 23.5%.

"Similarly, whilst the IMF predict that the Spanish economy will shrink by 1.3% in 2013, the Item Club themselves say Scotland's economy will grow in 2013."

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