Comment: Swinney wrong to cheer lame forecast

Bill Jamieson. Picture: TSPL

Bill Jamieson. Picture: TSPL

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SO IT’S official: Scotland is in recovery. The Fraser of Allander Institute has said so.

And barely were its upgraded forecasts released last week than finance minister John Swinney stepped out to welcome this assessment.

I believe Mr Swinney was wrong to do so. There was little in this highly cautious and qualified assessment to give the SNP administration much to cheer at all. This was arguably one of the most grudging appraisals yet made of our prospects and you would almost need a magnifying glass and Hubble telescope to discern the improvement it predicts.

For this year, Brian Ashcroft and his team have raised their prediction of growth in Scotland from 0.9 per cent to 1.3 per cent, and for 2014 from 1.6 per cent to 1.8 per cent. Given the spate of improving data on employment, retail sales, mortgage lending and consumer and business confidence, this analysis is equivalent to pulling teeth.

An improvement of just 
0.2 per cent in its 2014 prediction barely registers statistically. And in the real world many would be hard pushed to spot any difference. In hailing this as good news, 
I envy Mr Swinney his certainty that in rushing to embrace this blessing he has really received one.

In recent quarters Scotland has enjoyed slightly higher growth than the UK – a point the SNP administration has driven home in press releases. But on FoA projections this outperformance will disappear. Indeed, the FoA’s 2014 forecast not only lags the consensus predictions for the UK as a whole but conspicuously trails the forecasts of 3 per cent growth across the UK now being made by some independent forecasters.

A Scottish economy set to lag behind the UK as a whole by such a margin is not at all the picture that the SNP would care to see in the final approach to the independence referendum.

“There are good reasons,” the first paragraph of the FoA assessment proclaims, “to be hesitant about whether the recovery can be sustained.” Why is it so full of doubt about our prospects? Here are two reasons. First, it can barely bring itself to believe a recovery has unfolded at all. Indeed, it has doubted this recovery from the start, because it is not one that on its analysis should ever have happened. The latest forecast upgrade is one in a series of corrections that events have forced it to make.

The second, related to this, is that it may be missing a significant change in the supply side of the economy. I have argued frequently here that the economy emerging from the recession and prolonged period of stagnation is different in both composition and dynamic to that which entered it. Latest Business Statistics data released by the Scottish Government on the same day of the FoA release bear out this view.

Now there is much of the FoA assessment that I share. Not only has this recovery been the slowest to emerge of post-war downturns, but the time it is taking to return to previous levels of output is extraordinarily long. Second quarter GDP in Scotland was still some 1.4 per cent below its pre-recession peak. And the recovery is as yet too reliant on domestic consumer spending and borrowing. Given the continuing squeeze on household incomes, with real wages down some 7 per cent on 2008 levels, it is right to question how recovery can be sustained without improvements in business investment and in exports. But business investment is improving and the British Chambers of Commerce survey tells of new orders at their highest levels since 2004, this reinforced by latest PMI manufacturing data with strong growth in exports.

In a dark passage of high streets being taken over by pawnbrokers and charity shops, the FoA lapses into grim anecdotage: “impressionistically”, it declares, “it appears many people are selling assets – cameras, electric equipment and musical instruments” to raise funds for spending.

But the picture is more mixed and nuanced than this Dickensian excursion suggests. The same Scotland is also experiencing a surge in car sales while upmarket food retailer Waitrose is driving its biggest-ever store expansion north of the Border. Discount cereals may be selling well at Aldi. But so, too, is high-end balsamic vinegar at Waitrose. And sales of iPhones, iPads and tablets are growing faster than households can discard them. The problem for the FoA is that this is not a recovery driven by large government spending projects in the textbook Keynesian manner. Those old Keynesian volcanoes do not spume forth their fiery rock as once they did. But every so often they give forth the unmistakable whiff of sulphur. This latest assessment is one of these.

Few would disagree with the FoA’s critique of the unbalanced nature of recovery. But my main reservation is that its approach may not be capturing one of the biggest growth drivers in the years ahead – a change in the supply side of the economy.

We are seeing an explosion in micro-business formation and the rise of the internet entrepreneur, able with a small outlay to exploit opportunities for marketing goods and services not only locally but world-wide.

Scottish Government figures last week showed that the total number of businesses in Scotland has hit a record 343,000. Of this total, 341,000 or 99 per cent comprise small and medium sized businesses (SMEs). These now employ 1.1 million people in Scotland. The biggest element of growth – 73 per cent of the increase in the year to March – was in the ranks of sole traders and unregistered businesses.

Individually they may be insignificant. Collectively, they are a dynamic force. You cannot predicate future economic activity and demand on the basis of public spending alone.

A couple of final figures here give an idea of the scale of the change under way. The turnover of the “internet economy” is predicted to reach £221 billion by 2016. And an SQW report by Scottish Enterprise reckons that Scottish-based businesses now generate around £31bn in e-commerce sales each year.

This is one reason among several why I am more optimistic, and believe there is every prospect of the economy doing better in 2014 than the FoA forecast.

Twitter: @Bill_Jamieson

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