Services sector a drag on Scottish economy

London: The Scottish economy is slowly starting to recover from deep recession but weaknesses in the service sector mean it will underperform the United Kingdom for the next year, a forecasting group said on Sunday.

The prediction came as an Ipsos MORI Scotland poll showed Scots see unemployment and the economic situation as the two most important issues facing the country.

Scotland's economy will contract by 4.9 per cent this year, compared to a 4.6 per cent contraction in the UK as a whole, the Ernst & Young Scottish ITEM Club said in its annual forecast.

This trend will continue into next year as the private services sector drags down the relative performance of Scotland's economy, it said, with Scotland seeing growth of 0.7 per cent in 2010, in contrast to UK growth of 1.1 per cent.

"The recession has exposed a number of areas where there are disturbing weaknesses, not least financial services, business services and the hotel and catering sectors, which have all significantly underperformed compared to the rest of the UK," said Dougie Adams, the group's senior economic advisor.

"The slower recovery of these private services is expected to hold back the growth of the Scottish economy for at least the next 12 months."

ITEM said the financial services sector had been the biggest underperformer due to the impact of the banking crisis, which saw Scotland's two biggest banks, Royal Bank of Scotland and HBOS, become casualties of the credit crunch.

Output in the sector shrunk 8.4 per cent in the year to June, it said, compared with a 0.8 per cent fall in the wider UK.

Scotland's future economic growth will be dependent on a shift towards a more export-led economy, the ITEM report said, but added this would be an adjustment rather than a dramatic change to the fundamental structure of the economy.

"The low level of sterling presents a real opportunity for Scottish businesses to expand their market share and to help offset the impact of depressed domestic demand," said Adams.

The group expects Scotland's unemployment rate to reach 8 per cent in 2010, below its 8.6 per cent forecast for the wider UK, but warned there could be 14,000 fewer public sector jobs in Scotland by 2014 as the government reins in public spending.

An Ipsos Mori Scotland poll published found 42 per cent of people thought unemployment was the most important issue facing the country, while 37 per cent said the economic situation was the biggest concern.

The survey showed support for the Scottish National Party, due to set out its plans today for a referendum on independence, edged one point higher to 34 per cent between August and November.

The Conservatives and the Liberal Democrats lost ground to Labour, the poll of 1,009 adults showed, with 32 per cent of people saying they intended to vote for Labour in a Westminster general election, due by June, up 5 points from August.