The Scottish economy is expected to make a slow recovery from recession next year, an economic think tank has predicted.

Experts believe there will be enough growth to see the "technical recession" that gripped all sectors of economy earlier this year brought to an end.

The technical recession - two consecutive quarters in which growth fell - was the subject of a furious row in the Scottish Parliament and was the first in Scotland for 20 years.

However, economists at the Fraser of Allander Institute warned the country was still vulnerable to political uncertainties elsewhere in the world.

The manufacturing sector has been struggling

The recovery is expected to be led by the service sector, particularly business and financial services.

The beleaguered manufacturing industry, which has dragged the Scottish economy down in recent times, is also expected to show a modest recovery.

The institute, based at Strathclyde University in Glasgow, expects Scotland's economy to grow by 0.7% in 2002, less than its July prediction of 0.9%.

Unemployment is forecast to rise to 6.6% this year, a net loss of 5,800 jobs, before falling over the next two years.

'Below trend'

The economy could accelerate in 2003 and 2004, with the economists forecasting growth of 1.4% and 1.9% respectively.

In its October Quarterly Commentary, the institute said: "The service sector continues to perform strongly and there are some signs that manufacturing is beginning to recover.

"However, the turbulence in world equity markets following the corporate governance scandals in the US and the increasing prospect of war in the Gulf have again put the world economic recovery into doubt.

Motorola was one of the biggest casualties of the slowdown

"The Scottish economy will continue to recover but growth will remain below trend for the foreseeable future."

The institute reported a continued slump in manufacturing, with prices dropping by 4.3% in the first quarter of 2002, three times more than in the UK as a whole.

Electronics output fell over the year to March by 26.3%, outstripping the UK figure of 17.8%.

The sharp decline has been reflected by a string of high-profile redundancies in the Silicon Glen computer production belt.

Agency defended

Mobile phone firm Motorola made more than 3,000 of its workforce redundant when it closed its factory at Bathgate, West Lothian.

Computer giant Compaq shed 700 staff at Erskine and NEC Semiconductors lost 600 in Livingston to complete the gloomy picture.

There was also a contraction in the construction industry by 1.8%, despite strong UK growth of 3%.

The economy has become a political issue

The Fraser of Allander experts rejected any suggestion that Scottish Enterprise, the body charged with attracting investment and developing the economy, should be scrapped.

Scottish Conservative MSP Murdo Fraser last month suggested the body should be disbanded and its funding spent on schools and hospitals.

But the institute report said: "To retreat now from the development agency concept would be a retrograde step with little or no support from theory, evidence and practice."

The institute did warn that Scotland should not count on future inward investment from abroad, and that it should concentrate on building a strong indigenous enterprise culture.