Bill Jamieson: turbulent times for UK investment

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Nothing more shakes confidence in predicting the movements of financial markets and the economy than the events of the past 12 months. For on almost every measure they performed directly contrary to the predictions of experts.

Two giant political events – the UK vote on membership of the European Union in the summer and the US Presidential election in November – went counter to the forecasts of pollsters and commentators. But on Wall Street and in London, share prices hit all-time record highs.

Interest rates in the UK did not rise as widely expected. They were cut in the autumn – to just 0.25 per cent. The economy did not tank. It staged a remarkable resilience, confounding warnings from the highest levels of the Bank of England and the Treasury.

Consumers did not panic. House prices kept rising. Business confidence surveys rallied after an initial post-Brexit vote dip. And buoyant consumer spending kept the UK economy growing at the brisk pace of 0.6 per cent in the final quarter of 2016, marking a strong finish to the year despite the Brexit vote. The resilience confounded forecasters, some of whom feared the UK would slip into recession.

As for the stock market the FTSE 100 is now 17 per cent higher than its level 12 months ago – a gain of more than 1,000 points on its level of 6,060 in February of last year, hitting an all-time high at one point of 7,337.81.

Who dares risk a prediction now for the 12 months ahead – with tumultuous times especially in Europe with critical elections ahead? Here in the UK forecasts for 2017 have been pointing to a marked slowdown ahead: the recent average of 40 independent forecasts for UK GDP growth is 1.3 per cent in 2017 – but with a wide range – from 0.6 per cent to 2.6 per cent.

However, the Bank of England has painted a brighter outlook for the UK economy this year, with faster growth, lower unemployment and a more modest rise in inflation.

After further signs that consumers and businesses have shrugged off the Brexit vote, the Bank revised its earlier gloomy forecasts to predict the economy would grow by 2 per cent this year – matching its 2016 performance.

Looking at the global picture, the world economy has been growing at an annual average of about 4 per cent during the past few years.

But the recent World Bank annual Global Economic Prospects report predicts 
2.7 per cent growth in 2017. The US economy is forecast to grow by 2.2 per cent compared with an estimated 1.6 per cent in 2016.

Europe remains the laggard. The latest survey of forecasts in the Economist show a fall in the euro area from 1.6 per cent in 2014 to 1.3 per cent in 2017.

And Europe will not be short of potential major political upsets – with elections in the Netherlands on 15 March, and the French presidential election run-off on 7 May – both likely to see a swing in support for Right wing euro-sceptic and anti-immigration parties.

German elections are due not later than 22 October.

The paradox of Scotland

Amid the rumblings of a second independence referendum in the wake of the UK Brexit vote there has been a marked slowdown in the economy in Scotland.

Recent figures have been very disappointing with Scottish Government figures showing growth of just 0.2 per cent compared with 0.6 per cent across the UK as a whole.

Independent forecasts are also downbeat, with Fraser of Allander predicting growth of just 0.5 per cent in 2017. EY forecasts 0.4 per cent and PricewaterhouseCoopers 0.3 per cent. Inverness-based Tony Mackay reckons 2017 growth at 1.2 per cent – all these lamentable given the long term average growth rate of 2 per cent.

So what’s going wrong in Scotland? Brexit cannot be blamed for this poor relative performance as the whole of the UK would have been similarly affected.

The continuing after-shocks of the oil price slump have reverberated through hundreds of onshore specialist engineering and service companies across the country.

Tony Mackay reckons the oil price would need to recover to $70 before there is a significant revival.

Meanwhile, the construction sector has slowed after super-charged infrastructure-led project growth in 2013-2015.

So there are significant domestic “drags” and given budget constraints and continuing Indyref2 uncertainties.

Little by way of a break-out from this under-performance is expected for the forseeable future.

This article appears in the SPRING 2017 edition of Vision Scotland. An online version can be read here. Further information about Vision Scotland here.