While there are worrying ramifications, they are outweighed by the economic feelgood factor, writes Bill Jamieson
Further falls in unemployment; more full-time jobs being created; real, after-inflation earnings gathering speed – and petrol at the pump hurtling down towards £1 a litre: it’s as good as a tax cut for millions.
Such a combination, beyond the most sanguine forecasts of a year ago, should have businesses and households bouncing with optimism. Some now proclaim that the “cost of living crisis” is as good as over.
But instead, there is apprehension about the future, worries about the impact on Scotland’s economy – and the stock market falling like a stone.
A perfect example of how every blessing has a curse at the core? There has always been in the Scottish mindset a scepticism about “good news” – a gift we wrap up well in grim austerity paper. And it is certainly notable that the projections of almost every major Scottish economic forecasting group over the past three years have undershot the upturn by a country mile.
There is certainly good reason now for optimism to be qualified. The astonishing collapse in the oil price – down 42 per cent from $115 a barrel in September to below $60 this week – is a dramatic example of the volatility that can wreck the best-laid plans of economists and finance ministers.
In the independence referendum campaign, the SNP’s base case assumption was an average price for Brent crude of $113. “Even with a cautious estimate of oil prices remaining at $113 a barrel,” declared Alex Salmond, “it’s clear that Scottish oil and gas could generate three times more than official estimates.”
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Well, ahem, the price yesterday was down to $59.63. Now a great omerta has settled on those forecasts of gushing oil revenues. As these revenues are not among those items to be devolved under the Smith Commission proposals, the tax consequentials may be deemed irrelevant to the current “more powers” agenda, and “not our problem”. Spending ambitions can proceed as before. But a problem it most certainly is for an already cash-strapped UK government and whatever administration is formed after the general election next May.
Of direct concern for Scotland is that an oil price slump to an average $80 a barrel across 2015 could hit Scotland’s North Sea oil industry hard, with signs already of an investment pull-back. As this has been a key growth area in recent years, we may be set for a notable under-performance by Scotland’s economy overall relative to the rest of the UK. The North Sea is now a high-cost area and requires high oil prices to enable the development of new fields and possibly also to extend the lives of some of the existing ones.
If the price fall is sustained, warns economist Tony Mackay, it is likely to bring cancellation or postponement of some field developments – the Bressay and Rosebank field developments already affected. Those decisions were taken when the price was above $100, so there could be more projects put on ice.
And a report from Oil & Gas UK and the industry training body earlier this month predicts a 30,000 fall in employment over the next few years. Most of that would occur in Scotland.
Overall, Mackay concludes: “There will be serious negative implications for the Scottish economy, because of the importance of the oil and gas industry. There will almost certainly be a large fall in capital investment after 2016 and also a fall in oil-related employment.”
Arguably as worrying are the wider concerns over geo-political stability, with Russian financial markets in a tailspin, bringing knock-on effects for western Europe and creditor countries.
A big factor in the UK’s stock market slide is the fear that a global growth slowdown is a significant contributor to the oil price slump.
So much for the curses. What of the blessings? The RAC predicts that petrol could soon be selling at below £1 a litre, the lowest since May 2009. The average price has already fallen to 116.9p – nearly 14p a litre cheaper than at the start of the year. For rural households and businesses in Scotland, this cut in costs will be a real benefit.
The oil plunge has also been a major contributor to the inflation rate falling to 1 per cent, the lowest since September 2002. And the rate looks set to fall further in the early months of 2015.
Arguably the biggest beneficiary will be household finances. The long period of weakness in nominal and real-terms pay is ending. Citigroup economist Michael Saunders expects real pay per head to rise by more than 2 per cent in 2015 (that is, earnings growth of 2.5 per cent plus and CPI inflation about 0.5 per cent) with aggregate household real disposable income growth of 3.5 per cent year-on-year or so in 2015.
Of particular note is the assessment in the latest minutes of the Bank of England’s monetary policy committee that low oil prices (and weakness in other costs) are likely to produce a benign mix of strong real growth and very low inflation in the UK. “In net terms, the committee judged that the reduction in the oil price would, if sustained, act as a stimulus to growth in the UK and its main trading partners via its effect on the costs of production and real incomes.”
And thus far, Scotland has been enjoying its fair share of positive labour market news. Unemployment has fallen to 5.6 per cent. Over the year to end September, private sector employment in Scotland rose by 72,900, more than making good the decline in public sector jobs of 37,900. The proportion of Scots employed in the public sector is at its lowest since 1999. Across the UK, the growth in employment reflects full-time employees, and over the last quarter all of the growth of employment is accounted for by full-time employees.
Further upward pressure on pay is likely from a tightening labour market. The level of job vacancies across the UK, at 690,000, is within a whisker of the pre-crisis peak in March 2008 and the second-highest for any month since 2001. Demand for staff is particularly strong at smaller firms. While the overall level of job vacancies is up 22 per cent year-on-year, the number of vacancies at firms with fewer than ten employees is up 42 per cent and the number of vacancies at firms with 10-49 employees is up 37 per cent.
Notes Andy Willox, Scottish policy convenor of the Federation of Small Businesses: “To maintain this trend in 2015, we’ll need to keep focused on supporting Scottish small businesses to drive growth, create jobs and underpin communities. Our research shows that many businesses are wary about the year ahead and so we need to redouble our efforts to give firms the confidence to succeed.”
Cheaper fuel, lower transport costs, interest rates to stay low and real earnings set to expand: all things considered, the oil price plunge has to be seen as a blessing, not a bane.
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