Scotland is facing its worst recession since the early 1980s, an economic report said today.

Scotland is facing its worst recession since the early 1980s, an economic report said today.

The country's gross domestic product is expected to contract by 0.4% next year, according to the Ernst & Young Scottish ITEM Club annual forecast.

This would be the worst performance for the Scottish economy since 1980 but better than the rest of the UK, where ITEM predicts a fall in output of 1%.

It also predicts that Scotland will suffer a less pronounced contraction next year than the rest of the UK and it expects Scotland to outstrip UK growth in 2010.

However unemployment in Scotland is expected to rise 4.4% to levels last seen in the late 1990s, up nearly 50,000 to 124,000.

Around 20,000 of these job losses will be in the private services sector.

Construction employment will decline by 7,000 or 6.2%, while 11,000 manufacturing jobs will go by 2010.

The financial sector will also be hard-hit.

Dougie Adams, economic adviser to the Ernst & Young Scottish ITEM Club, said: "Scotland has accepted that a recession is now inevitable.

"The economy must face a future with a changed landscape for its previously buoyant banking sector."

He added: "A number of factors hold the key behind recovery.

"These include policy actions at a global and UK level, including any fiscal measures announced in the pre budget report, and the fall in oil and commodity prices.

"The sharp decline in inflation that is in the pipeline will buoy disposable incomes and leaves an open door to further interest rate cuts.

"Finally, the UK will also benefit from the sharp fall in sterling that is unlikely to be frittered away by wage inflation."

The report predicts that consumer expenditure will fall by 1% in 2009.

Mr Adams said the picture for the housing market was also bleak.

He believes it is likely to see very low transaction volumes and falling prices for some time to come.

A less exposed housing market and a larger public sector are key reasons why ITEM expects the Scottish economy to contract less than the UK in 2009.

It also believes that London and the South East will take a bigger hit from the financial services fall out than Scotland.

However, the restructuring of the Scottish banks poses a risk to output and employment, ITEM said.

Hywel Ball, managing partner of Ernst & Young's Scottish practice, said: "Businesses are generally entering this downturn in a better state, in terms of their financial positions, than has typically been the case in post-war recessions.

"In previous recessions, particularly that of the early 1990s, Scotland has fared well because of a strong performance from financial and business services.

"The downturn in financial services, our previous star performer, makes this recession unprecedented."

The ITEM Club uses the HM Treasury's model of the UK economy.