A ROUND of applause is surely due this morning to an early Scottish success at the Olympics. I refer to the display on the verbal gymnastic bars by our very own Dr Gary Gillespie, chief economic adviser to the Scottish Government.
Rarely have we been treated to such strenuous crystal-ball juggling, a PowerPoint tour de force, culminating in a superb double somersault and perfect finish, his conclusions coming to rest exactly where we are all standing already. That’s economics!
Dr Gillespie can fairly claim to hold the most challenging job in Scottish Government today: how to present Scotland’s economic performance and prospects without plunging into a catatonic depression and with conclusions capable of immediate relay hand-over to a cabinet secretary gagging for an optimism sprint. He also has to perform this feat convincingly in front of a First Minister who is not only a fellow economist but who also has Nobel Prize winner Joe Stiglitz on the end of a telephone. Volunteers for a go on this economic pole-vault, anyone? Thought not.
In his latest quarterly appraisal of the Scottish economy, Dr Gillespie set out to strike two notes simultaneously. One was a realistic assessment of our prospects. The second was to sound a note of optimism. On the first, he warned that continuing problems in the Eurozone and concerns over growth in export markets elsewhere mean that we will be unlikely to see a return to previous levels of prosperity before 2014. He expects growth to be “fragile” through 2012 before “picking up somewhat in 2013” and returning to “near trend” in 2014 – a somewhat resonant year, some will note, in the Scottish political calendar.
Both themes merit further exploration. For all the caution and tentative wording, this forecast would still be regarded by many as relatively optimistic – particularly the reference to a return to near-trend growth. On what does Dr Gillespie base his proposition that Scotland could bounce back before the rest of the UK?
Here he argues that Scotland is “possibly” in a better position, given our relatively stronger historic savings ratio compared with the UK as a whole. On mortgage debt, Scots households did not on average incur the high ratios of loan to income in the debt-fuelled period 2003-07 as in the rest of the UK. And we have continued to enjoy a higher household savings ratio.
In this I believe his analysis to be broadly correct, both in historical evidence and on a recovery potential based on household confidence. I have argued here before that a revival in consumer propensity to spend critically rests on a return to lower levels of indebtedness and a greater sense of household financial security. Borrowing as a proportion of income needs to return to ratios similar to those of 12 to 14 years ago before the debt splurge began. This takes time. But household assets are still on average comfortably in excess of liabilities. And a return to more sustainable levels of borrowing may well come sooner in those areas where debt-to-income ratio extremes were avoided.
However, I fear that in advancing higher savings as an economic good, Dr Gillespie may have committed dangerous political incorrectness in the uber-Keynesian St Andrews House. Is not saving the opposite of what we should be doing? Do we not have a Keynesian savings glut? And if households continue to insist on saving instead of spending, should we not seize their pension funds and pour those cash mountains into ambitious “shovel ready” road and rail projects?
Any more of this and I fear the first shovel-ready project for Scotland’s chief economist may be digging his own grave prior to being taken out and summarily shot. Indeed, barely had he concluded his PowerPoint presentation than cabinet secretary John Swinney renewed his calls on Westminster to embark on an immediate spending uplift. There seems to be no problem to which more borrowing is not the solution, and more spending the best solution of all. To amend the admonition of St Augustine: Oh, Lord, make me save, but not just yet.
Even assuming these ambitious infrastructure projects can overcome planning and regulatory protocols and be “shovel ready” over the next 18 months, can the confidence-crushing crisis in the Eurozone and the threat of global slowdown be so effectively countered?
Here I genuinely wonder if Dr Gillespie has been cautious enough. It is, of course, an obligation on government economists not to succumb to despair and to advance plausible grounds for hope. But this should not blind us to the gravity of the situation we face.
On the same day, and at the same time as he was giving his analysis, I attended quite a different presentation of our prospects in Edinburgh. The now customarily crowded annual general meeting of Personal Assets Trust heard the fund’s investment adviser, Sebastian Lyon, present a sharply different view.
Those looking for an early recovery would have been rudely disabused. This, in PAT’s view, is no downturn easily susceptible to the orthodoxy of more government spending. On the contrary: it explains the mess we’re in. Equity markets, he began, would be much lower were central banks not keeping stock prices artificially high by means of zero interest rates and quantitative easing. He reminded the audience of the warnings from Bank of England governor Sir Mervyn King that we are not yet half way through this crisis, a warning repeated only a few weeks ago. No early recovery is in sight.
Politicians here and across the Eurozone have an invidious choice between severe austerity – likely to lead to periodic recessions and declining tax revenues – or incautious borrowing in the hope of buying growth. Both approaches, Mr Lyon warned, will eventually force governments to pay higher rates of interest on debts. “The maths”, he concluded, “do not stack up. No wonder governments are looking to extricate themselves from an intractable problem by leaning on central bankers to pull their inflationary strings”. And the problems that have dogged Europe since early 2010 “are merely the dress rehearsal for the main event – a US fiscal crisis”.
For those wont to dismiss this ultra-cautious Edinburgh investment trust as a lone or marginal voice, its stock market capitalisation now stands at more than £500 million, up from £95m in 2002. It is hugely popular. Indeed, such was the investor demand for its shares last year that it raised £132m of new capital. Little wonder its annual meetings are so heavily attended and that PAT has come to articulate less a passing equity investment stance than a profoundly apprehensive world view.
It is a different world view to that offered by government officials. That said, Dr Gillespie is right to be cautious and right on the merits of saving. His more gentle analysis should not blind us to the deepest financial crisis we have faced for a century – and the time it will take to overcome.
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Weather for Edinburgh
Sunday 26 May 2013
Temperature: 9 C to 16 C
Wind Speed: 15 mph
Wind direction: West
Temperature: 8 C to 12 C
Wind Speed: 18 mph
Wind direction: South