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Economy to flatline as lack of demand bites

THE Scottish economy will likely continue to flatline this year, after further declines in activity in the manufacturing, construction, retail, wholesale distribution, and tourism sectors in the fourth quarter of 2012, a leading business organisation has warned.

VACATION: As many countries' economies struggle, Scotland's vital tourism sector continues to suffer from a drop in visitors. Picture: Gordon Terris
VACATION: As many countries' economies struggle, Scotland's vital tourism sector continues to suffer from a drop in visitors. Picture: Gordon Terris

Scottish Chambers, publishing its latest business survey today, highlights lack of demand as the key problem facing the economy. It flags lack of demand from the consumer sector, citing unemployment and people's fears about losing their jobs, and the impact of austerity on public spending.

Its report comes hard on the heels of a survey yesterday from the Confederation of British Industry in Scotland, which revealed the first quarterly fall in export orders for the manufacturing sector north of the Border in three years. The CBI survey also showed Scottish manufacturers suffered a seventh consecutive quarter of decline in domestic orders in the latest three months. It also revealed a second straight quarter of declining volumes of Scottish manufacturing output.

The findings from the CBI and Scottish Chambers surveys are likely to fuel fears that Scotland, like the wider UK economy, is in danger of falling into a triple-dip recession with possible declines in gross domestic product (GDP) in the fourth quarter of 2012 and first three months of 2013.

But Garry Clark, head of policy and public affairs at Scottish Chambers, believed debates over the potential for triple-dip recession in 2013 were unhelpful.

He said: "The story is about continued flatlining, rather than getting too wound up about whether we enter triple-dip."

Noting Scotland's lack of progress in returning to its peak in output before the 2008/09 recession, and the fact it was more than 4% adrift of this level according to the latest available official figures for the second quarter of last year, Mr Clark said: "It doesn't look as if we are making significant progress to get [back] there at the moment. That is a demand issue. That is tough to get around.

"There doesn't seem to be anything on the horizon in terms of a boost to consumer demand. Public sector demand - is limited in terms of the austerity we are experiencing."

He added: "It is still difficult to see where an increase in [consumer] demand is coming from. At the end of the day, unemployment is still a problem. Fear of unemployment is still an even bigger problem. Austerity bites right through to the consumer. It is difficult to see where you get an upturn in demand in the short term."

Mr Clark warned that, for many Scottish businesses, activity in 2013 was "more likely to reflect an economy bumping along the bottom - rather than one in real recovery mode".

The Scottish Chambers survey, conducted in conjunction with Strathclyde University's Fraser of Allander Institute, signals that the fourth quarter saw further sharp falls in overall sales in retail and wholesale distribution, another tumble in demand for tourism providers, and a continued decline in orders and contracts for the Scottish manufacturing and construction sectors.

On a more positive note, the fourth-quarter declines in manufacturing orders and construction contracts signalled by the survey were not as steep as had been feared by firms.

Manufacturing was the only one of the five sectors surveyed by Scottish Chambers to signal a rise in employment in the final three months of 2012, although this increase appears marginal and a renewed fall is projected this quarter.

Scottish Chambers expressed hopes that the tourism sector north of the Border could have a better year in 2013, highlighting the negative impact of the London 2012 Olympics and generally poor summer weather last year.

CBI Scotland director Iain McMillan said of his organisation's latest industrial trends survey: "These results are disappointing and show that manufacturing industry in Scotland still faces a very difficult economic situation both at home and overseas."

He noted Scottish manufacturers surveyed by the CBI were forecasting a rise in export and domestic orders in the coming three months, but warned: "The numbers do not indicate any real strength of recovery going forward."

Mr Clark also highlighted tougher export markets, notably in the eurozone.

He noted Scotland had enjoyed reasonable success in export markets for a "couple of years" after the 2008/09 recession.

However, citing the difficult eurozone climate, he said seven out of 10 of Scotland's top export destinations were in the eurozone and nearly half of Scottish overseas trade went to the single currency bloc.

Mr Clark warned: "Until, in the eyes of the market, that situation is resolved, we don't see an uptick in demand there either."

Subtracting the percentage of manufacturers in the CBI survey which reported a rise in exports from that posting a fall, a net 9% suffered a drop in the latest three months. A net 15% reported a fall in domestic orders, and a balance of 11% said output was down.

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