Forecasts of the Scottish economy [December 2003]

The outlook for the world economy remains promising with the US driving growth. There is also strong growth in the Far East particularly in China. An area of concern is the Euro Area, which remains depressed compared to other major economies. This is largely due to the situation in Germany. Forward indicators for the Euro Zone are improving suggesting that recovery will take place in 2004 but that trend growth will not be achieved until 2005. The UK economy continues to perform well. GDP data for the UK has been revised up (mainly due to the construction sector) and growth is forecast to be 2.0 per cent in 2003 and 2.6 per cent in 2004. There are some inflationary pressures in the economy. The Bank of England is concerned over household debt and a strong housing market. These were significant factors in their decision to raise the Bank of England interest rate in November to 3.75 per cent. The UK labour market remains buoyant with employment growth and low unemployment. We are forecasting that the UK will return to trend growth by 2004 and certainly by 2005. The latest Scottish GDP data were encouraging overall. Manufacturing is still experiencing problems but the service sector continues to grow at just below 3 per cent on an annual basis up to the second quarter of 2003. Within services transport and communication, financial services and real estate and business services are the strongest growing sectors. We are forecasting that Scottish GDP growth will be 1.3 per cent in 2003 and 2.1 per cent in 2004. In 2005 we forecast growth of 2.3 per cent