For the past few months we have been spared attention on the bigger and more immediate problems Scotland faces. As George Orwell once noted: “To see what is in front of one’s nose needs a constant struggle.”
But it should be a struggle no more to see a recession ahead – and one set to be more severe in Scotland than the rest of the UK.
Our problems here are both serious and deep and prospects for the UK overall offer no comfort. The latest Markit UK Purchasing Managers Index for July is truly a shocker. It has fallen to its lowest since April 2009 and well below the warning level indicating recession. Both manufacturing and service sectors saw a decline in output and orders.
The real and present danger of recession has prompted new Chancellor Philip Hammond to talk of a “reset” of fiscal policy in the Autumn Statement.
Why is the outlook worse for Scotland? If only our problems here were solely or even mainly confined to the aftershocks of Brexit. Unfortunately, not only has our economy been slowing for more than a year but the sharp downturn in construction activity – well under way before the Brexit vote – is set to have a major impact.
This might have been cushioned by a robust performance from manufacturing, business services and retail. But all three of these are weakening – and have been doing so for a year.
The depth of this predicament has been obscured by the Scottish government’s overriding focus in recent weeks on attempts to frustrate the UK government’s activation of Article 50 and on stepping up its campaign for a second independence referendum – possibly as early as the first half of next year. Without this political noise, the economic outlook would rightly have commanded far greater attention at Holyrood.
Here are the facts. Official data released last week revealed no growth in the Scottish economy in the first quarter of the year. This followed a series of warning signs including recent falls in employment levels, construction output and business survey results.
Over the past four quarters Scotland’s Gross Domestic Product (GDP) rose by 0.6 per cent, while GDP per capita (a more accurate reflection of the change in the standard of living) is just 0.4 per cent above the level of a year ago.
Relative to the UK, Scotland has been growing more slowly, with UK growth over the past quarter up 0.5 per cent and over the past four quarters up 1.7 per cent.
As for the future, all three major crystal ball gazers – The Fraser of Allander Institute, EY (Ernst & Young as was) and Inverness-based Mackay Consultants – have downgraded their forecasts. FoA has lowered its 2016 growth forecast from 1.9 per cent to 1.4 per cent, EY is down to 1.2 per cent and Mackay has cut its growth prediction from 2.1 per cent to 1.6 per cent. Little by way of recovery is seen next year.
Worries centre on Scotland’s construction sector. Output here fell by 1.5 per cent in the first quarter – worrying in itself, but it also deprives Scotland’s economy of any boost from what had been its fastest growing sector over the past two years. And it is the context of this decline, as well as its arrival well before Brexit, that now commands attention at the highest level of the Scottish Government.
Much of this will be known to the new economy minister Keith Brown. But if there is one analysis which should be on his desk for immediate attention, it is the latest Scottish Trends appraisal from the economist John McLaren.
Not only is his work more clearly and incisively set out than the wordy FoA analysis, but its focus on the construction sector this month also makes for compelling if uncomfortable reading.
“Prospects for the growth of the Scottish economy,” he writes, “are probably bleaker now than at any time since the finance led crisis in 2008.
“Even a return to average growth throughout the rest of 2016 would only result in year-on-year growth of around one per cent in 2016. However, with construction output likely to decline further, then a year of no, or even negative, growth is possible, with prospects for 2017 also looking gloomy due to Brexit.
“Much of this has been foreseeable for some time, if a little obscured by the construction data, and in normal circumstances one would have expected the state of the economy to dominate the political discourse, but instead politicians have been consumed by two referendums and two elections.”
The first three months of the year also saw employment decline by 50,000. Business surveys – for example the Bank of Scotland PMI, the RBS (Scottish) Business Monitor and the Scottish Chambers of Commerce Quarterly Business Survey – showed various elements of private sector output stagnant or contracting over this period.
All of this, as McLaren reminds us, is on top of the on-going concerns over investment and employment, onshore and offshore, in the North Sea related business.
Performance figures have been flattered by major new infrastructure built over the past two years linked to large projects like the Forth Replacement Bridge and the Borders Railway. But some of these projects are now finished or close to completion.
“The implication of this analysis”, he warns, “is that, instead of buoying up Scottish growth as it has in the past two years, the construction sector may have a negative impact in the quarters to come, as infrastructure declines to more normal levels. This path seems likely unless private housing new build returns to its previous highs, not something that is currently forecast, especially post the UK’s Brexit vote.
“Now that the huge boost to the Scottish economy from the construction sector has come to an end, the underlying weakness of the Scottish economy has been exposed.
“Furthermore it is difficult to see where growth will come from over the rest of the year to enable 2016 to be anything other than a low or no growth year. And all of this before the potential negative impacts of Brexit are factored in.”
Over to you, Keith Brown.