Outlook and appraisal [October 2002]

Scotland was in technical recession at the beginning of the year. Fortunately, on the evidence to date, this recession should not be sustained. The service sector continues to per- form strongly and there are some signs that manufacturing is beginning to recover. The electronics sector lost more than a quarter of its output over the year to the first three months of 2002. Some slight comfort can be drawn from the fact that the downturn in UK electronics is now as bad as it is here. But there are few, if any, signs that a recovery in the sector is on the way. By contrast, other services, business services and financial services in Scotland are all outperforming their UK counterparts. The UK economy picked up in the second quarter and it is likely from business survey evidence that growth will pick up here. However, the turbulence in world equity markets following the corporate governance scandals in the US and the increasing prospect of war in the Gulf, have again put the world economic recovery into doubt. But signs of recovery are still evident. In the light of this, we have revised our forecasts for Scotland down slightly since we last reported in July. The Scot- tish economy will continue to recover but growth will remain below trend for the foreseeable future. The position in the labour market is more sanguine. Much needed jobs are being provided through sustained growth of the service sector, thus offsetting job losses in manufacturing. Unemployment will remain low and may fall further next year. But the growing uncertainties in the world political situation pose significant threats to the durability of the recovery in Scotland as else- where