By Daniel Hunter

According to the latest Economic Commentary from the University of Strathclyde’s Fraser of Allander Institute, sponsored by PwC, the Scottish economy showed evidence of genuine growth in the third quarter of 2012.

However, doubts still linger on whether this improvement can be sustained, with survey evidence suggesting a weakening in the final quarter of last year and uncertain prospects for 2013.

GDP growth is now forecast to be 0.9% in 2013 and 1.7% in 2014, a lowering of the Institute's forecast in November, rising further to 1.9% in 2015.

“We expect to see some modest growth in the Scottish economy this year. However, growth should be a lot higher than it is given we are now five years on from the start of the Great Recession," Brian Ashcroft, Emeritus Professor of Economics at the University of Strathclyde, said.

"Household demand, net trade and investment demand remain weak while fiscal austerity continues with 68% of planned benefit cuts and 78% of current departmental spending cuts still to come after April this year."

According to PwC, the report highlights the important role both the UK and Scottish Governments play in creating an environment that not only stimulates business growth, nurtures entrepreneurship and creates new services and jobs, but drives an economic momentum that inspires confidence, delivers investment and improves export activity to emerging markets.

“Two aspects of our sectoral performance stand out in the Commentary. Firstly, our business and financial services sector has shown continued recovery in the past year, with a growth rate of 3.9%, over double the UK rate," Paul Brewer, Senior Office Partner at PwC in Edinburgh, commented.

"And reflecting the Scottish Government’s focus on infrastructure spending, the Scottish construction sector has strongly outperformed the, admittedly weak, performance in the UK as a whole.

“The challenge will be maintaining this momentum in an economic environment that shows limited prospects of growth in the short term and an increasingly tightening fiscal squeeze.”

According to the Economic Commentary, the main components of aggregate demand - private investment, household demand, net trade and government spending - in the Scottish economy remain weak.

Government fiscal consolidation is set to increase as the UK Government strives to meets its target of balance in its (cyclically adjusted) current budget in five years. And the prospects for a growth in the contribution of net trade depend much on the recovery of demand and output in the eurozone and wider growth of world trade. Huge uncertainties exist over eurozone prospects. The main beacon of hope is recovery in the US economy but this is not without its uncertainties.

Brian Ashcroft, Emeritus Professor of Economics at the University of Strathclyde, continued: “Ironically, the UK lost its AAA credit rating not because of fiscal profligacy but because of austerity. The austerity has severely lowered growth and tax revenue prospects as affirmed by the IMF. The only silver lining is that it will, from previous evidence e.g. Japan and the US, have no effect on the low UK long-term borrowing rate.

“The ability of credit agencies to judge sovereign debt default prospects is not highly rated by financial markets. And they are right. The way is still open for a massive boost to infrastructure spending in the UK financed through additional borrowing at exceptionally low rates. If only the Chancellor would take it in his Budget on March 20th.”

Paul Brewer, Senior Office Partner at PwC in Edinburgh, added: “Aside from the notable exception of the oil and gas sector, overall investment levels still weak. The Chancellor needs to look at all opportunities to stimulate investment and focus on the drivers of healthy sustainable growth in the Scottish and UK economy.”

Projected net job creation is 9,400 this year, rising to 19,150 in 2014 and 31,800 in 2015. The Institute continues to expect the unemployment position to deteriorate slightly in 2013 and 2014 compared to 2012 due to weaker output and employment growth.

Unemployment is now forecast to be 218,300 by the end of 2013 and 228,500 in 2014. By the end of 2015 unemployment is forecast to have fallen back to 204,100 as the economy recovers more strongly. But the Institute warns that many workers have left the labour market, probably because of an inability to find work, they are not claiming benefits. As a result, the measured unemployment rate is becoming a less and less accurate measure of the extent of labour reserves and the underlying misery of job loss.

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