Newcastle knows all about recession. The collapse of its shipping and mining industry in the late 1970s and early 1980s saw unemployment in parts of the city hit 50 per cent. Images of deserted shipyards remain seared on the memories of a generation.

More than a quarter of a century on, many worried that the collapse of Northern Rock, Newcastle’s revered local bank, would precipitate a similar meltdown. “We were all afraid we’d go back to the 1970s,” Alex Banks, a retired teacher with savings in the bank, said. “I was worried for my city.”

There are some signs that Mr Banks’ fears were justified. Newcastle’s housing market has collapsed, according to architects and developers contacted by The Times. Newcastle Building Society reported this month its first loss in 146 years after it invested £46 million in failed Icelandic banks. Ilva, a furniture retailer similar to Ikea and a big employer in the city, went bust last June. And Nissan, based in nearby Washington, cut its production in January at a cost of 1,200 jobs.

And yet, there is optimism among Newcastle’s business and government leaders that their city’s diverse economy is better placed to deal with the recession than other parts of the country.

Paul Walker, the chief executive of Sage, the international software company that is one of the city’s largest employers, said: “In the mid1990s, we put investment into science, education and the public sector. We’ve got a lot of different businesses which could help us come out of the downturn better than the Midlands, which is quite dependent on the car industry.”

Newcastle has invested £250 million in new cultural development over the past decade, transforming once squalid areas into tourist attractions. Across the river is the weirdly undulating, glittering Sage Gateshead, the music centre designed by Lord Foster of Thames Bank. Glass-fronted office buildings house smart wine bars buzzing with drinkers. It is a far cry from 15 years ago, when Newcastle’s quayside was a favourite spot for prostitutes and drug dealers.

Other major cultural attractions have sprung up, such as the Baltic Centre for Contemporary Art, the Theatre Royal (which hosts the Royal Shakespeare Company’s Northern season) and the Biscuit Factory, a Victorian factory converted into one of Europe’s largest contemporary art galleries. Some call it “the Bilbao effect”, after the reawakening of that grey Spanish city in 1997 when the Frank Gehry-designed Guggenheim museum opened there.

Newcastle’s cultural regeneration has so enhanced the city’s reputation that in 2007 it was included in Lonely Planet’s list of top 30 places to see – worldwide.

“Ten years ago we didn’t have city break tourism here, but it’s now worth £1.2 billion a year,” said Andrew Dixon, the chief executive of the Newcastle Gateshead Initiative, set up to promote the region. Newcastle and Gateshead have seen a 42 per cent growth in hotels since 2002 and a further 1,000 hotel rooms are being built.

The city, with its good transport links to London and an international airport, is also fast becoming the favoured destination for business people. “We’ve turned down over £30 million worth of international conferences because we don’t have the space,” Mr Dixon said. His group is in “serious discussions” to get a dedicated conference centre built.

All this activity seems to be having the desired effect. Between 2001 and 2007, Newcastle’s population rose by 2 per cent after eight years of continuous decline. GCSEs in the city have improved in each of the past eight years, with the number of students achieving five or more passes at A* to C grades, not including Maths and English, rising from 39.6 per cent in 2003, to an above-UK average 66.9 per cent last year.

Newcastle’s two universities – Newcastle and Northumbria – have record numbers of students. A new campus building was completed in 2007 to house the business and law schools. More than 42,000 students enrolled in this academic year and they provide a crucial buffer to the economic downturn. Education brings in £900 million a year to the city’s economy.

Yet, while tourists and students continue to spend money in Newcastle, there is a lingering sense of unhappiness among some of the locals. Stephanie-Faye Bambrough, the manager of Oliviana’s, a small Italian restaurant on the quayside, said: “Regulars used to go to restaurants and spend £30 on a steak. Now they’ve downgraded to pizza or aren’t coming out at all.”

Ms Bambrough pointed out many restaurants and bars around Newcastle’s “diamond strip”, a prime location just north of the Tyne, that had closed recently. “Next door closed a month ago, the Indian shut late January and the big restaurant on the corner went into liquidation,” she said.

But those now too poor or frugal to eat in Newcastle’s restaurants have boosted one of its best-known brands. Despite the bloodshed on the high street, Greggs, the baker, has experienced only a small dip in both footfall and average spend from its one million customers. Its 99p sandwich range and £1.20 Fairtrade coffee are attracting customers in droves.

“With a typical spend of £2, our value for money offer is proving resilient,” Richard Hutton, the group’s finance director, said. Sales at Greggs were up 3.2 per cent for the first ten weeks of 2009 – despite the snow in the first two weeks of February.

However, overall confidence among businesses in the city is slumping. Richard Slack, a reader in accountancy at Newcastle Business School who compiles a twice-yearly survey measuring confidence in 250 businesses around the North East, said that the effects of the downturn were permeating the local economy. “I expect that our survey, in May 2009, will show diminishing order books, declining consumer spend, more difficulty in obtaining finance and cancelled plans to expand production,” he said. “It’s very uncertain. There’s a feeling of fragile resilience.”

John Shipley, the leader of Newcastle City Council, said: “We’ve got to focus on our strengths. Medical research, education, green energy and arts and culture. We’re a science city.” Mr Shipley referred to the Newcastle Breweries site, which was recently demolished to make way for a £700 million “Science City”. Work on the project could start in 2010 with the aim of creating a centre for scientific excellence and 5,000 new jobs.

Newcastle has been at the forefront of energy-saving initiatives, too. A planning application to build a wind turbine plant at a former Newcastle shipyard was lodged last week with the council. It could create 3,000 jobs.

Lauded by local politicians as Tyneside’s new industrial revolution, the factory will be built by Shepherd Offshore, run by Freddy Shepherd, the former chairman of Newcastle United. Mr Shepherd said he hoped that the north bank of the Tyne would become “the European hub for this new, green industry”.

“In terms of the green agenda and meeting the problem of supply to the energy industries, we’re in a very strong position,” Mr Shipley said.

Newcastle, like the rest of the North East, has been criticised for its dependency on the public sector. Some 37 per cent of the workforce is employed by the Government, including the thousands who work at the Department for Work and Pensions, the universities, the council and the city’s two hospitals.

But many argue that this bias is crucial to soften the impact of recession. “The public sector is a big part of the economy,” Mr Walker said. “In boom times you don’t see the uplift but, in downtimes, you’re quite shielded.”

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