Recession: what does it mean in Scotland?
Let's do the statistics first.
The technical definition is of two consecutive quarters of economic contraction, meaning the amount of money British companies and people are making is less than in the previous three months.
The figures out this morning are for the fourth quarter of 2008.
The third quarter saw a 0.6% contraction, and the second quarter saw the economy stalled. So the pattern is one of acceleration into trouble, with most forecasts saying the negative numbers are likely to continue throughout this year.
The Scottish Government prepares its own figures, and we'll see more of them next week.
However, their preparation is slower, and because of the way they are counted, they are less reliable than the UK statistics and more vulnerable to random fluctuations.
The most recently published show there was still weak growth in the second quarter of 2008, and we are soon to find out if the third quarter saw Scotland heading backwards.
But the third quarter was before the British banking system came close to collapse, and with lending squeezed, the picture across the economy has changed very significantly since then.
So not only are these dry statistics, but they are also lagging a long way behind some harsh realities at the start of this year.
What the figures represent is an apparently small contraction, on a scale which many households could easily withstand.
But because Britain is one of the countries that has been living beyond its means, not only is there less money to spend, but there is a sharp pulling back in lending and borrowing as well, exacerbated by this being a bank-led credit-tightened recession.
Tied to that is the change of behaviour after 18 years of continuous growth.
Companies that failed to cut production are left with stock they can't shift, and staff with less to do, and their biggest threat - worse than falling order books - is if they can't get cash flowing through the business from their customers.
The key to understanding a recession is the decline in confidence. People stop borrowing to spend, and raise the share of their income they put into saving, if they can.
Those with debts try to pay them off. And those losing their jobs will struggle to pay those debts, including mortgages.
Repossessions and bankruptcies are sure to result, as the figures are already showing.
We have already seen retail patterns of consumers trading down to cheaper goods. While premium food brands are suffering, sausage and baked bean sales are up, as are cheaper cuts of meat.
Restaurants are facing a downturn in trade, and more people are buying ingredients for cooking at home - which is why the supermarket business is suffering less than others.
Big ticket items are being put off. Kitchens, bathrooms and carpeting are finding it tough going. Travel businesses are assuming a drop in those booking foreign holidays.
Car dealerships are having to discount heavily, and still suffering steep falls in business.
As we've seen most of the past year, the property business is in real trouble, with clear, knock-on effects for the construction industry.
While prices have fallen, at least as significant is how few properties are changing hands, because both sellers and buyers lack confidence to get into the marketplace.
In Scotland in particular, it started the descent into recession from a better position than the UK average, which has not been the case previously.
It has a bigger cushion of public sector jobs, which have more security than the private sector. The fall in house prices has been significant but not as sharp as parts of England.
Much of Scotland's less efficient, uncompetitive older industries were cleared out - painfully - in previous recessions, whereas one of England's big headaches is with car manufacturing, which is not inefficient but is part of a global crisis in the industry.
Scotland's biggest special concern is with the finance sector, which accounts for one in ten Edinburgh jobs, plus many more in Glasgow and Perth.
Many more business services companies are dependent on the big finance houses.
London is even more exposed to that, as is Yorkshire, but it is Scotland's reputation for canny money management that is taking a real pounding with the publicity this week for the Royal Bank's losses.
The uncertainty in banks' liabilities and throughout Britain's property markets has fed uncertainty in stock markets. With falling asset values on financial investments, it gets harder to see how and when that confidence will return.
Hullo, I'm Douglas Fraser, and I'm business and economy editor at ´óÏó´«Ã½ Scotland. Welcome to my blog, where you can read my take on money matters, viewed from a Scottish perspective.
Comment number 1.
At 23rd Jan 2009, British_Lion wrote:I live in Edinburgh and things need to change. The whole city's economy is built on finance and property, almost everywhere you look it's Solicitor this, Property Manager that, Financial Services this, Bank that; now that those are basically dead in the water what happens now?
I don't see how a city of such international importance can possibly allow its entire foundations to rest on such economic volatility. The Edinburgh property market has been slowing down noticeably for at least eighteen months now, and it's all come to a head in disastrous fashion.
Things need to seriously change in the future to prevent this from happening again, this goes for the whole of Scotland and the UK.
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Comment number 2.
At 23rd Jan 2009, veryfaraway wrote:The recession is necessary as a reality check. So many adults seem to have no concept of self-responsibility and the consequences of their own actions.
A lot of growth was based on debt that could not be paid back... Spend while you can and who cares about tomorrow. Result - the crash comes.
Shouldn't we be glad there is a decline in confidence - when that was based on "borrowing to spend".
I thought Scotland had a good education system. Basic arithmetic doesn't change. You want to spend more, earn more. Can't afford a house (and I can't) don't buy one. Build on sand, watch it fall down. This is all such basic logic.
Confidence will return as and when people get real about their own situation. As "Britain has been living beyond its means" what can anyone expect?
The collusion between irresponsible lenders and borrowers HAD to end and adjustment is necessary.
Unfortunately high compensation packages are no longer linked to intelligence and good professional conduct.
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Comment number 3.
At 23rd Jan 2009, A_Scottish_Voice wrote:This comment was removed because the moderators found it broke the house rules. Explain.
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Comment number 4.
At 23rd Jan 2009, pattymkirkwood wrote:'English' car-manufacturing will never recover while the UK remains outside the Euro. The new plants need to serve more than one country, and why on earth would you base that plant in a country with its own wee, unstable currency?
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Comment number 5.
At 23rd Jan 2009, jockbast wrote:Who is Douglas Fraser and does he actually know anything about business or the economy? Here we have yet another example of quite lazy bland journalism which has marked much of the ´óÏó´«Ã½'s coverage. Weary generalisations about economic stats and a few patronising nods towards the "general populace", i.e. baked beans etc etc.
Are all these "business journalists" at the ´óÏó´«Ã½ actually encouraged to get out and meet people who - perish the thought - actually run businesses, or is it just the usual chattering class approach? This disappointing blog has told us nothing in the weeks since it began that we couldn't have heard in a thousand other ´óÏó´«Ã½ news items. Wasn't Mr Fraser a political or education journalist in the past? He certainly doesn't impress on the business front.
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Comment number 6.
At 23rd Jan 2009, Kirspin wrote:Thank you Mr. Fraser for writing on this world wide problem, my wife is from Edinburgh and like me now lives in Canada!
We have relatives in Scotland and also property so its good to get a first hand account of how things are there. Looking forward to lots of news about Scotland and also the United Kingdom
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Comment number 7.
At 23rd Jan 2009, kaybraes wrote:I bought a new cooker this month. After watching the prices through December and part of January on the net at most of the big name electrical stores. The so called price reductions were a joke , I finally bought from an on line store at nearly £100 cheaper than on the High St., no wonder the big companies are suffering, they think the punters are mugs. The same holds true for most of Scotland's motor dealers, the so called discounts are being clawed back from the part exchange values, but the cost of second hand on the forecourt is still a rip off. Internet brokers can take £1500 -£2000 off the forecourt prices on new cars in Scotland, and these cars are from franchised dealers in the south.
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Comment number 8.
At 24th Jan 2009, JavaMan wrote:KayBraes,
Totally agree, the car Industry in Scotland is a joke. I would NEVER buy from a Scottish dealer - total rip off and the cars are often tarted up with a wee haircut (clocked) flung in for good measure!
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Comment number 9.
At 24th Jan 2009, Anaxim wrote:As said above, Scotland has advantages in this recession, not least a smaller property bubble.
But I worry that, even more than the UK generally, we're still wedded to the ideas which got us into this mess. We're hearing far too much about 'building the brand' and 'feel-good factor', rather than practical, physical ideas. The time for psychobabble is past.
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Comment number 10.
At 25th Jan 2009, skyehighmileage wrote:As companies publish their results for last year, there is going to be a temptation to clean out the stable. This is a good time to do it: any bad business decisions or losses that they may have been managing or providing against in their accounts, this is the year to take the hit because with so much bad news out there, management can point to the worldwide economy and hope to minimize the criticism of them. If the share price falls, well everyone else is down as well....
The auditors are going to be wanting to avoid the risk of overstating the company's position so are going to be taking a very cautious and pessimistic view...so I expect that things are going to look even grimmer than the actual trading results for last year were, as a wave of "confession" sweeps across finance directors and boards.
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Comment number 11.
At 26th Jan 2009, HunkieDunkie wrote:And if you count the 2008 Q2 Zero% growth - then you could say that we have been in this place for 3 moths more than acknowledged...
The Great Gordo still will not acknowledge the truth...
Better placed than any other, blah, blah, spin, spin... yawn...
We have another 2 years of this!!!
Go!
One in three to go at RBS?
Edinburgh's doomed! We're all doomed...
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Comment number 12.
At 30th Jan 2009, nevarg wrote:BT are closing the only Scottish Engineering control at the end of February. All engineering controls will be based in England. This is despite the Glasgow control office having some of the best stats in Britain, can anyone explain the justification of this.
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Comment number 13.
At 2nd Feb 2009, dennisjunior1 wrote:Douglas:
Thanks for writing this excellent report about the downside of the recession in Scotland....
~Dennis Junior~
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