The Labour Party may have won the Glenrothes by-election this week, partly on the back of the Prime Minister’s handling of the financial crisis, but Gordon Brown’s Scotland is predicted to suffer more than the rest of Britain during the economic downturn.

Scotland was named European Region of the Future for the second time in four years by the Financial Times’ fDi (foreign direct investment) magazine this year.

But figures show its growth is likely to lag behind the rest of the UK during the oncoming recession.

According to the Scottish Item Club’s 2008 Economic Prospects report, the Scottish economy is estimated to have grown 1.8 percent in 2008, 0.3 percent less than the UK’s rate. By 2009, this gap will have worsened to 0.6 percent. 

The main reason is the Scottish economy’s vulnerability to a weakening financial services sector.

This sector has been the driving force behind the country’s growth during the past decade, providing tens of thousands of jobs. Since 1998, its output has represented more than 8 percent of total Scottish GDP, and it has grown at an average annual rate of 7.3 percent.

But the result of a more cautious banking sector is likely to be a drop in financial services growth to only 2.9 percent in 2008. 

The situation has not been helped by the likely takeover of HBOS, which includes the Bank of Scotland, by Lloyds TSB, with an expected swathe of jobs cuts in its Edinburgh head office.

The banking sector accounts for more than 10 percent of Britain’s financial services employment, the Item Club said.

Secretary of State for Scotland Jim Murphy told Reuters the sector faced “specific challenges” because of the economy’s concentration in that area.

“That sector is feeling the most,” he said.

“But Gordon Brown has said he will do everything it takes to support it.”

Other factors are likely to worsen the situation, the report added, such as a slowing down in the growth of public spending, the lagged impact of interest rate rises since August 2006, persistently high real oil prices and slowing U.S. and European economies.

Construction, another area of relative strength in Scotland in recent years, has also been growing more slowly than its UK counterpart.

Investment is forecast to drop sharply over the coming year, CBI Scotland said last week, and manufacturers are reporting problems accessing internal finance, the Financial Times reported.

“In the coming year economic conditions in the UK will provide a much tougher backdrop for the Scottish economy as the impact of the credit crunch ripples out to other sectors of the economy,” the report added.

“If a return to sluggish growth is confirmed, then it raises questions on how Scotland will perform in a much less benign environment, with financial services in the developed world at the epicentre of slowing growth and public spending growth under much more pressure than at any time in this decade,” the report went on to say.

People living in Brown’s constituency, a former coal mining area, have felt a decline for the past 20 years, including the decade of economic growth Brown presided over as Chancellor.

William Anderson, a 52-year-old psychiatrist nurse, said the motto in Kirkcaldy was “home, dole, giro” - referring to the reliance on the state in the area.

“Shops and pubs are closing,” he said. “The social scene is disappearing.

“You now get two and three generations of families unemployed. There is rough housing and crime. My parents don’t go out after 6pm anymore. There is generally a bad feeling, a negative feeling since the 80s.”

The Scottish National Party, which has a majority in the Scottish Parliament, has devised a six-point plan to help Scotland avoid the worst effects of recession, the Financial Times said.

These include bringing forward capital projects to stimulate construction and the housing industry, boosting energy efficiency and improving advice to businesses and streamlining the planning process.

But the sense of a recession has already hit Glenrothes.

Murray Pearson, a retired company director, shopping in one of Scotland’s biggest indoor retail centres, said most people were only looking, not buying.

“There are plenty of people about,” he said. “But they are not spending, and they are going to cheaper places.

“We are definitely cutting back on Christmas — everything is so expensive.”

They all agreed. “She was lovely.”

Sarah Brown finally stepped out from the shadow of her husband, Gordon, and appeared on the campaign trail.

While the prime minister was dashing around the world as a global economic statesman, saving the financial system, Sarah was helping save her husband’s political reputation on home soil.

She made numerous appearances in Glenrothes, Scotland, to campaign on behalf of the Labour candidate Lindsay Roy, a headmaster at Gordon’s old school, in a parliamentary constituency that backs on to his own Kirkcaldy seat.

So successful were her visits that Labour began to regard her as a “secret weapon”, boosting Gordon’s image and helping defy the bookmakers’ odds and hold onto the seat against a confident Scottish National Party (SNP).

“It was nice to see her,” said Louise Glancey, a 44-year-old staff nurse, who saw her campaigning.

“I think, generally, people are happy to see them [Sarah and Gordon]. It’s annoying to get the leaflets, but it is good to see them being enthusiastic.”

She added: “I quite admire her not being dressed in Armani — she just wore a plain black suit, quite normal.”

Christine Barbour, 61, a retired council worker, added: “She wasn’t pushy.

“She was nicer looking in real life than on TV. Tall and elegant.”

“She was down to earth,” John Johnstone, 72, a former tanker driver, said.

“The majority of the country is working class, so it’s important to be able to speak on their level. She was very easy to speak to.”

The conversation did not delve into the merits of Keynesian philosophy during an economic downturn, but rather in the style of Michelle Obama, it touched more upon the domestic.

“We talked about children,” Barbour explained.

While Sarah Brown has kept a lower profile than the wife of Barack Obama, the U.S. president-elect, they have both exuded affection and admiration for their husbands.

Sarah’s surprise appearance at this autumn’s Labour Party conference, defending her husband ahead of his crucial speech, won glowing reviews.

She may not yet stretch to gently mocking Gordon for leaving his socks lying around Downing Street, or proclaiming “Gordon gets it” in a similar vein to Michelle Obama, but she has increasingly become a factor in Gordon’s survival strategy.

Now all she needs to do is get rid of her excessive minders.

“She was surrounded by the Gestapo,” Barbour said.

“There was an entourage of about 10,” added Glancey.

Journalists and TV crews felt the full force of their menace. “I want you guys on the green,” they quoted the Labour men as saying.

“There will be six or seven guys with guns who will keep you away from her. You may be shot and then it won’t be my problem.”

Winning over the voters is half the job. Winning over the media can be more difficult — just ask Cherie Blair.

Newspapers are crediting Gordon Brown with Labour’s surprise win in the Glenrothes by-election and says it has ended any talk of a cabinet coup.

They say his gamble to break with the convention that a prime minister does not campaign in by-election polls succeeded. Brown visited the seat twice, while his wife Sarah was on the local trail at least half a dozen times.

“This was a high-risk strategy, but it paid off. Now, as a result, it looks as if Mr Brown himself won the by-election,” said the Scotsman.

“Gordon Brown’s political renaissance continues apace after an astonishing result on his home turf that was beyond Labour’s wildest dreams and neither side predicted,” said the Daily Telegraph.

“Lindsay Roy is the new MP. But Glenrothes is Gordon Brown’s triumph,” said The Times. “Two months ago it looked as if this contest could seal the end for Mr Brown. Now it has confirmed a truly remarkable comeback. Labour’s general election majority was halved but, because of the way expectations had developed, this result had all the feeling of a landslide.”

Brown’s frequent appearances on national television as he tackled the financial crisis also helped prevent a repetition of the Scottish National Party’s crushing victory in Glasgow East in July, the Times added.

For the Financial Times it was “a result that confirms Gordon Brown’s political revival and is likely to ignite speculation over a possible early general election.”

The Guardian said the victory would “put a spring in Brown’s step” and said he was now secure from a leadership challenge. “The retention of Glenrothes protects Brown still further: there is no way that future Labour activists will chant “Remember, remember the 7th of November” as they recall an attempted 2008 plot.”

But The Independent reminds readers that retaining what was after all a safe Labour seat does not mean the next general election is in the bag. “The remarkable turnaround will lift the spirits of Labour’s MPs and activists. But, as they breathe a sigh of relief, they will be under no illusion about the electoral mountain Labour still has to scale to win the next general election.”

(Photo: Labour candidate Lindsay Roy celebrates after winning the Glenrothes by-election. REUTERS/Stephen Hird)