Gerald Warner: We are heading for a recession

'WE'RE a' doomed!" That is the chorus of the Jeremiahs who are currently predicting economic slowdown will lead to recession and, beyond that, total meltdown and the end of civilisation as we know it.

A local, more reedy descant is singing a slightly different tune – "They're a' doomed!" – in the conviction that Scotland may weather the storm while the rest of the UK succumbs.

The reality is that economic prediction, for all its solemn rubrics and liturgy, is ultimately as unreliable as speculation on the turf or the dog track. In any case, the extravagantly conflicting views of forecasters guarantee that, whatever the eventual outcome, three-quarters of them will inevitably be proved wrong.

What is the definition of a recession? The usually accepted criterion is two consecutive quarters in which GDP decreases. The gallows-humour maxim among financial anoraks is: when your neighbour loses his job, that is a recession; when you lose your own job, that is a depression.

And in recent days, more and more people who perhaps previously thought themselves immune to the economic storm have found themselves at its centre. Possibly least surprising was the news yesterday that, with the property market stalling at best, housebuilder Cala had laid off 30 staff and halted work on many of its sites.

Meanwhile, Savills, Scotland's most upmarket estate agent, confirmed to this newspaper that it had laid off a "small" number of workers. And Edinburgh's legal establishment was shocked by rumours that one firm had parted company with a handful of fee-earners – sparking fears that this could be the first of many such contractions. If even lawyers are being made redundant, isn't that a clear sign of the depth of the economic troubles we are in? Are any of us safe?

People know intuitively when they are heading into a recession, much as an experienced sailor can detect a coming storm without recourse to instruments. Common sense dictates that Britain is entering a period either of recession or of something virtually indistinguishable from it.

Last week alone saw enough ink-black clouds swirling on the horizon to make any seasoned financial matelot run for port. A succession of figures from the index of the Chartered Institute of Purchasing & Supply relating to the manufacturing, construction and service sectors showed increasing contraction. The construction sector fell to 38.8, 11 points below the level at which contraction begins. Even in the service sector the index of sales and business conditions fell to 47.1.

Last Wednesday the US formally entered a bear market when stocks registered a 21% decline from peak value; the following day Britain went bear too when the market slumped to 20% below the peak of June 2007. Would the authoritative financial scribblers care to run their fashionable theory past us one more time – you know, the one about Britain and the rest of the world now being "decoupled" from the US economy? Decoupled, on this occasion, by 24 hours.

Some of us lend more credence to George Soros, who back in January predicted that Britain would follow the US into recession. The evidence was all there. Did Americans commit any sub-prime solecisms that Britons did not match? Is not our fragile economy precariously based on house prices that, at any moment, could slide downward with as much volatility as oil has gushed upward? That, of course, was another of the joys of last week: oil trading at $145 a barrel.

There is, however, a school of thought which maintains that even if England follows America down the tubes, Scotland can remain serenely immune. They have statistics to back their claim. Retail sales in Scotland rose by 2.4% in May compared with the same month last year, while the UK figure was only 1.9%. In Scotland, unemployment in the period from February to April fell by 20,000 to 4.4% – the best figures since 1992 – while the claimant rate fell to 2.6%, a record low of 116,000. In contrast, the UK figure saw its biggest leap in two years, up by 38,000 to 1.64 million. The OECD predicts 100,000 UK job losses this year.

Despite the news from Cala and Savills, house prices have demonstrably held firm in Scotland so far, while HBOS forecasts a 9% fall in UK house prices. And so on: there are various economic indicators that look good for Scotland. Indeed, if the slowdown remains just that and does not deteriorate into full-blown recession, these modest advantages might cushion Scotland against serious economic problems.

Yet such rose-tinted statistics are in many ways misleading. The Fraser of Allander Institute is forecasting a Scottish growth rate of 1.9% this year, as against 1.8% for the UK, but with the caveat that it expects the UK figure to outstrip Scotland in the succeeding years. By 2011 it predicts Scottish growth of 1.9% as against UK growth of 2.6%, which, if fulfilled, would scupper the Scottish Government's target of equalling UK growth by 2011.

These, of course, are the sort of economic statistics that are bandied around in polite society. The real underlying facts about Scotland's economic base are fastidiously ignored. Details such as the public sector accounting for 55% of the Scottish economy – 74% in Ayrshire – are not greatly dwelled on. Scottish unemployment is understandably lower when 23% of the workforce is in the tempest-proof public sector while, since 1997, 100,000 manufacturing jobs have been lost.

This is as near a command economy as survives in Europe and it is not equipped to weather the heavy seas of a recession. In fairness, neither is the UK economy. For that has been under the control of a redistributist for 11 years and the attrition has been frightful. Gordon Brown raided pension funds, initially, of £5bn a year, rising to £7.3bn. His total take now amounts to £100bn and he has cost British investors £270bn in lost equity values. Under his regime tax has risen from 39% to 43% of GDP.

Britain is not alone in its troubles, of course. A survey of thousands of private companies across Europe last week showed that Spain and Ireland's private economies are slowing at an even faster rate. Simultaneously, Denmark became the first European country to meet the general definition of recession when it recorded two straight quarters of falling GDP.

But many economists believe that Britain might have had reasonable prospects of avoiding recession if our economy had been better managed. The UK current account deficit reached 5.7% of GDP in the third quarter of last year, showing that the Exchequer was running a deficit even before the credit crisis, when it should have had a surplus.

Britain's economy is like a paper boat afloat in stormy seas. The crew does not inspire confidence, and not just the politicians. When the Northern Rock crisis struck, both Mervyn King, Governor of the Bank of England, and the Prime Minister behaved like rabbits in the headlights.

Incoherence and contradiction are the Bank's current response to the threatened recession. Torn between the desire to combat inflation and to ease the credit squeeze, conflicting messages are baffling the markets, where uncertainty is the deadliest of all depressants. While nobody should ever underestimate the inflationary menace, heaven forbid that the Old Lady should follow the example of the European Central Bank and devastate the economy with interest rate hikes.

So, there you have it. We are almost certainly tumbling into a recession. And Brown, the man largely responsible for causing it, will be the same individual whose remit it is to cure it.