Forecasts of the Scottish economy [October 2002]

There are now clear signs of recover y in the US although this is proving to be slightly delayed and relatively weak due to the fall in equity markets. The potential for conflict with Iraq has also increased tension and raised the degree of uncertainty in the world economy. Japan remains a problem but the rest of the Asia region appears to be recovering relatively well. The recovery in the Euro Area is still in the very early stages and both France and Germany are likely to perform less well than their neighbours. The UK economy is relatively well positioned to pick up again next year with forecast growth of 1.6% this year and 2.6% next year. Inflation, interest rates and unemployment remain at historically low levels in the UK and macroeconomic policy has been stable but supportive. Consumption remains relatively strong in the UK although the recovery is expected to be export led. There are signs that business confidence, investment and profits will be more promising next year. The labour market has weakened slightly since the last quarter. Both consumption and government spending remain important components of demand in Scotland. Tourist expenditure growth has improved slightly but it is expected that activity will accelerate further from 2004 onwards. The service sector continues to drive growth particularly financial services and real estate and business services. Both inward investment and transport and communication services could be slow to grow given the current uncertainty in the economy. All economies are at risk from another significant stock market correction or from any conflict in the Gulf. The main problems are likely to be higher oil prices leading to increased inflation and a decrease in consumer spending as household wealth shrinks. Debt is unlikely to be a significant problem because the payback ratios remain high even though the level of debt has increased.