Scotland will face a recession so severe that it could claim up to 60,000 jobs, according to a new report.

The economy will contract by 0.4% next year — the worst figure for 19 years — with financial services bearing the brunt of the downturn, the Ernst & Young Scottish Item Club claimed in its annual forecast.

The forecast’s author, Dougie Adams, says the recession will see unemployment rise by at least 50,000 to about 124,000, a level last seen in the late 1990s. The private services sector would account for 20,000 of the total, while 11,000 jobs could go in manufacturing and 7,000 in construction.

He warned that if the fallout in the financial sector were more severe, the economy could slow by as much as 1% next year, with the total number of jobs lost approaching 60,000. In that case, it would grow by only 1% in 2010 and the loss of output over the next two years would be equivalent to £5 billion.

The report also highlights for the first time the wider of impact of the crisis in financial services. Figures show the industry poured as much as £7 billion into the economy in 2004. Postal and courier services benefited to the tune of £547m, £513m went on computing and £146m on air transport.

Adams said: “With fewer people travelling on business, air services will be hit, but how all of these areas will be affected will depend on the extent of the cuts in the financial sector. Scotland is one of the most exposed regions in the UK outside London to financial services and the challenges have long-term implications for the pace of growth.”

Business services are set to suffer from a fall in spending, which is likely to see jobs lost as HBOS merges with Lloyds TSB and RBS contracts.

Adams, an economic adviser to the Item Club, said: “Scotland has accepted that a recession is now inevitable. The economy must face a future with a changed landscape for its previously buoyant banking sector.

“We expect Scotland to suffer a less pronounced contraction than the rest of the UK, where GDP will fall by 1%. By 2010, Scotland will see growth of 1.5% compared to 1% for the UK but lag behind the UK after that.”

Adams said that, unlike previous recessions, Scotland was entering this one with a stronger employment position and that its larger public sector and less volatile housing market could help to speed the recovery in 2010.

“It would be wrong to only see downside risks because action taken by governments could mean that by the end of 2009, signs of recovery should be visible,” he said. “A number of factors hold the key to recovery, but it depends on both the willingness of the banking system to extend credit and the readiness of businesses and consumers to use it.”

Hywel Ball, the managing partner of Ernst & Young’s Scottish practice, also said the recession was “unprecedented” as the private services sector had helped Scotland weather previous downturns.

But he said the outlook was not totally bleak: “In the UK financial services shake-up, Scotland’s critical mass of banking, insurance and fund management skills, along with a reputation for low rates of labour turnover, may provide the base to retain or attract activities north of the border.

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