Bill Jamieson: Economy a fickle friend to Yes camp

A Glasgow youngster holds a Yes Scotland campaign poster. Picture: Robert Perry

A Glasgow youngster holds a Yes Scotland campaign poster. Picture: Robert Perry

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IT may not have been an overpowering tide of good news. But the latest economic pointers – that 0.5 per cent rise in Scottish GDP in the final quarter of last year and now the better-than-expected 0.3 per cent advance in UK GDP in the first three months of 2013 – have all but banished fears of that dreaded “triple dip” recession.

No-one – not even the Westminster government – is hailing last week’s GDP surprise as a sign that we are definitely on the mend, still less as a cause for celebration. Continuing downward pressure on household incomes, subdued retail sales, miserable trade figures, a glacial improvement in government borrowing and concerns over the recent weakness in employment data cannot but induce a mood of caution.

But there are signs of recovery in certain areas, and the effect on business confidence of a step away from the recession precipice should not be under-estimated. Last week’s figures, combined with changes to the Funding for Lending scheme, stabilisation of consumer debt and, not least, the prospect of more clement weather, could perceptibly nudge the dial of confidence forward. And with corporate UK sitting on a stonking cash pile of £708 billion in sterling and foreign exchange deposits at banks, equivalent to 45.6 per cent of GDP, that could make quite a difference if the GDP improvement is sustained over the next 12 months.

So what are the prospects for a continuing recovery in Scotland? And how might any change in the recovery pace affect the outcome of the independence referendum next year? For it is a sure bet that the pro-independence camp will be following every twitch in our economic fortunes with keenest interest. The Scottish Government wasted no time in hailing that uplift in Q4 GDP – markedly better than the performance recorded for the UK overall during that quarter – as evidence of its championing of “shovel ready” projects and superior economic stewardship.

However, let’s not run away with ourselves and assume future quarters will show the same angle of uplift. Indeed, those Scottish GDP estimates showing a 0.5 per cent increase over the third quarter of 2012 and a 0.4 per cent improvement on the final quarter of 2012 (UK comparator: minus 0.3 per cent) has caused head-scratching among economists as to how this superior performance was achieved.

The latest estimates show that the output of the service sector rose by 0.3 per cent, production by 1.1 per cent and construction by 0.6 per cent. As the service sector accounts for some 72 per cent of total output its performance is the dominant factor. But hidden in the improved performance estimate for production was an eye-watering 8.8 per cent rise in electricity and gas supply. “That”, in the pithy summation of economist Tony Mackay in his latest Scottish Economic Monthly Report, “is incredible”.

Given that electricity and gas consumption in Scotland have been falling recently, and that demand in England and elsewhere in the UK will also have been depressed due to weak growth, Mackay believes that “the Scottish government statisticians’ estimate of +8.8 per cent growth in electricity and gas supply is wrong and that the overall estimate of 0.5 per cent growth in Scottish GDP is also wrong”.

Subsequent developments point to a bumpy first quarter in Scotland at best. Adverse weather in February and March will have hit both the retail and construction sectors. And the recent news flow on jobs has not been at all encouraging. The positive announcements – 150 new tax jobs at KPMG Glasgow, 94 new jobs at SAS East Kilbride and 50 at ENE in Wishaw – have been buried under a torrent of recent job loss announcements. These include Scottish Coal (450 jobs to go), Lloyds Banking Group (110), Jeyes, East Kilbride (100), Thomas Cook (84) and Diageo (80).

For the moment the forecasts for the Scottish economy are widely divergent. Ernst & Young is the most pessimistic with growth projected of just 0.7 per cent for this year. The Fraser of Allander Institute, where Brian Ashcroft resides, is forecasting 0.8 per cent. Tony Mackay, despite his critique of the GDP numbers, is the most optimistic with a prediction of 1.5 per cent growth.

Expect much commentary as the year progresses on how Scotland’s economic performance might affect voting in the independence referendum next autumn. The conventional wisdom is that an uplift in the economy here might boost confidence and encourage more Scots to vote Yes. It would add credence to the Scottish Government’s narrative that it is an able steward of the economy and that Scotland would be perfectly able to go it alone.

However, the opposite could well hold true: a stalled recovery or a lapse back into recession would feed into a mood of disenchantment and that Scots, scunnered by relentless “austerity”, would be more prone to voting for a radical change. Independence on this scenario may well be seen as no worse than the current arrangement and indeed, a new start under a separate constitution could be seen to offer an escape route. Some may even feel that a Yes vote would bring an early end to “London-enforced austerity” with its continuing squeeze on public sector spending.

Then there is – as always – “the middle way”. Scotland’s economy swings neither up nor down but bumbles along with continuing fractional growth. We are neither in recession nor in recovery but trapped in the doldrums and with little prospect of any significant movement. The national mood by then may be one of restless frustration, which the Yes camp may be able to exploit with talk of tax cuts and North Sea oil financed capital spending projects to lift employment, investment and activity. Is this not, after all, what independence is for?

But it is just as likely that a sceptical disillusion may have set in: a sense that, whatever the constitutional arrange-ments, there would be little, if any, economic benefit for the foreseeable future, and indeed that with the economy continuing in such a fragile state any upheaval and further uncertainty at this time is best avoided. This would continue to be the prevailing mood across business. Uncertainty over the outcome of protracted negotiations with the UK Government over currency sharing, state pension funding and administration, public deficit and debt, financial regulation and separate taxation would be seen at best as a distraction and at worst an enormous handicap for Scots firms. The fear would be that the after- math of a Yes vote could put fragile growth in jeopardy.

As for immediate prospects, just nudging the needle on the dial of confidence would be an achievement – not at all impossible, and in my view more than likely, but all too vulnerable to setback. Outside the Holyrood bubble, it is the state of the economy, not the state of the constitution, that is the biggest concern.

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