Item Club downgrades Scottish economic growth forecast

The report said economic recovery was in part being hampered by uncertainty abroad

A leading economic forecaster has downgraded its prediction for Scottish growth this year.

The Scottish Item Club had predicted economic expansion of 1.1% in 2012.

But in its latest summer update, the Ernst & Young-sponsored forecaster said it now expected growth to reach just 0.3%.

It said the country's recovery continued to be hampered by uncertainty abroad and reluctance by businesses to invest at home.

Its latest forecast is slightly below the rate of growth forecast for the UK as a whole, and marginally down on the 0.4% growth achieved in 2011.

Growth next year is forecast at 1.1% although the Item Club said it believed employment levels would remain flat well into 2013.

Its report described export success as a "key component" of economic recovery, but noted that a narrow export base was acting as an impediment to Scottish growth.

It said exports had been boosted by the fall in the value of Sterling, while the success of the whisky industry had "proved to be a boon".

But the report added that the "narrowness of recent successes" suggested that the ability of Scottish businesses to capitalise on export opportunities was weaker than that of the UK as a whole.

'Dangerous phase'

Dougie Adams, from the Scottish Item Club, said: "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.

"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 economic forecaster said it expected overall manufacturing output to stagnate in Scotland in 2012, while construction was 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 down on it pre-crisis trend rate of growth.

The report argued a number of associated risks continued to cloud the forecast.

"The eurozone crisis is the most pressing risk to the Scottish economy," said Mr Adams.

"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."

A Scottish government spokesman said: "This report highlights that companies are sitting on cash and not investing. In such times it is therefore vital that government does all that it can to support the economy.

"It is clear that the Westminster Coalition government's austerity approach is failing.

"The Scottish Government has repeatedly called on the UK Government to follow a growth agenda to improve economic confidence, support businesses through improved access to finance and invest in the country's infrastructure.

"We continue to press the UK Government to fund a list of more than 30 'shovel ready' construction projects in communities across Scotland which would boost economic activity and jobs."