It's 'highly possible' Scotland is heading for a recession and could 'take a sharp turn for the worse' if Brexit goes badly

Shelter from the Storm, Loch Stack, Sutherland, Scotland

Dougie Cunningham

LONDON — Scotland is "edging closer" to a recession and its economy could "take a sharp turn for the worse" if Brexit negotiations go badly, according to a new report from leading economic forecasters.

A quarterly report from the Fraser of Allander Institute at the University of Strathclyde said Scotland's economy shrank by 0.2% in the last quarter of 2016 and warned that further negative quarters are "highly possible."

A recession is defined as a fall in GDP in two consecutive quarters. The group forecasts that growth will return to Scotland in 2017, but says the next set of quarterly results will be "a close run thing," with the gap between Scotland's economic performance and that of the UK as a whole growing, as demonstrated by the chart below.

Difference between Scottish & UK economic growth since 2015

Difference between Scottish & UK economic growth since 2015

Fraser of Allander Institute / Scottish Government, Q4 GDP

Fraser of Allander director Graeme Roy said: "On balance, our forecast is that growth will return in 2017, with tentative signs of a more positive outlook for Scotland's oil and gas sector and improving order books across Scottish businesses.

"In the current climate sentiment can change quickly. Should the upcoming Brexit negotiations go badly, or the UK economy slows down more quickly than anticipated, then Scotland's economic prospects could take a sharp turn for the worse."

He added: "That being said, a number of sectors should post relatively healthy returns this year. In particular, Scotland's food and drink and tourism sectors should benefit from the low value of Sterling."

The report says that, given that the rest of the UK economy continues to grow, Scotland's poor economic performance cannot be explained by the impact of the Brexit vote last June.

It also says sluggish growth cannot solely be explained by the downturn in the oil and gas industry, on which it is heavily dependent.

Instead, it says: "The economy is stuck in a cycle of low growth, weak investment and fragile confidence."

The report forecasts growth of 1.2% in 2017, 1.4% in 2018, and 1.6% in 2019.

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