By Daniel Hunter

The Ernst & Young Scottish ITEM Club has downgraded its 2012 growth forecast as uncertainty abroad and reluctance by businesses to invest at home continues to hamper the country’s recovery.

Its latest summer update, published today, predicts economic expansion of just 0.3% (down from 1.1%) this year, slightly below the rate of growth forecast for the UK as a whole. This is also marginally lower than the 0.4% growth achieved in 2011.

Growth in 2013 is forecast at 1.1% — again, less than that expected across the whole of the UK — although ITEM believes employment levels will remain flat well into that year.

“There are fears that the world is stumbling deeper into crisis. The eurozone dilemma has entered a dangerous new phase, questions are being asked of China’s ability to avoid a property-driven hard landing and the US recovery can be described as lacklustre at best," Dougie Adams, senior adviser to the Ernst & Young Scottish ITEM Club, said.

“The resultant consternation means cash-rich corporates are showing little or no intention of putting their cash piles to work. Growth prospects will remain poor unless this money begins to flow into our economy, while the caution exercised by the corporate sector means that the public sector deficit is unlikely to narrow any time soon.”

The report notes that Scotland’s economy appears to have enjoyed little direct support from public sector output in the period since 2007. Public sector GVA north of the border increased by 1.6% in the intervening period, compared with growth of 4.6% in the UK as a whole.

Additionally, central government and local authority employment has fallen at a faster rate in Scotland since 2008. Headcount is down by 41,000 across these arms of government, representing a fall of almost 10% in local authorities and around 4% at local government level, with Scotland accounting for more than half of central government jobs lost in the UK in the past three years.

“Scotland’s weaker public sector performance plays a part in explaining why the country has lost a disproportionate amount of jobs since the beginning of the crisis,” Adams added.

The reports states that export success is a “key component” of economic recovery, but notes that a smaller export base is acting as an impediment to Scottish growth.

Exports have been boosted by the fall in Sterling, while the success of the whisky industry has proved to be a boon. However, as Jim Bishop, Ernst & Young’s Scotland senior partner, points out, the narrowness of recent successes suggests that the ability of Scottish businesses to capitalise on export opportunities is weaker than that of the UK as a whole.

“This will limit growth in the medium term unless more Scottish companies invest in the exploration of development of emerging export markets, or more export-orientated companies can be lured to the country,” he said.

ITEM expects overall manufacturing output to stagnate in Scotland in 2012, while construction is forecast to grow in line with the economy at 0.6%. The businesses services sector is expected to enjoy output growth of around 2%, a little below its pace of growth in 2011 and well below its pre-crisis trend rate of growth.

However, as the report emphasises, there are a number of associated risks that continue to cloud the forecast: “The eurozone crisis is the most pressing risk to the Scottish economy,” Dougie Adams added.

“Our forecast is predicated on policymakers containing the crisis and averting a Greek exit from the single currency. The opposite scenario could trigger a chain of events that results in the collapse of the eurozone and leads to significant falls in output and employment in Scotland,” he concluded.

Join us on
Follow @freshbusiness