Bill Jamieson: Don't cast a clout till May's Brexit is out

Let's count our blessings. National Happiness Week passed without undue disturbance in the streets, or in the national mood. We stayed calm throughout. Our prospects, say the economic forecasters, are still bleak, though perhaps a fraction less depressing than they feared in January.

Prime Minster Theresa May at the final day of the European Council leaders summit in Brussels. Relations with the EU are still of pivotal importance. Picture: Jack Taylor/Getty

No cause, then, for euphoria, irrational exuberance, bubbly happiness or over-optimism of any sort. Our growth rate, as forecast by the Office of Budget Responsibility, will crawl along at a sub-par 1.5 per cent this year. And consumer spending is set to grow by just 0.9 per cent. So much for a mood lift from all those Amazon parcels.

As for pay prospects, 2018 will continue to see meagre rises in earnings across the UK, with annual pay growth looking better at 2.6 per cent but actually falling by 0.2 per cent when adjusted for inflation. I am reminded of the admonition hung on the wall of the Victorian poor house, but which could be dusted down for many offices today: “The floggings will continue until morale improves.”

And yet… there are two sides to even the dullest coin, and our national condition is no exception. “Austerity” – the black cloud of restraint that has hung above our national condition for the past nine years – now seems to be at an end.

Government borrowing over the first 11 months of the fiscal year 2017-18 is running lower than feared by the OBR, giving Chancellor Philip Hammond some leeway to lift government spending. The borrowing total so far is £41.4 billion – some £2.5bn lower than the previous year.

Last week brought news that more than one million NHS staff, including nurses, porters and paramedics, are being offered increases of at least 6.5 per cent over three years, with some getting as much as 29 per cent . The deal, costing £4.2bn, is tiered with the lowest-paid in each job receiving the biggest rise.

Elsewhere in the public sector, firefighters, police and prison officers have already been offered pay rises in breach of the cap. Police and prison officers have accepted rises of one per cent with a one per cent bonus, and 1.7 per cent, respectively, for the coming year.

As for those cheerless GDP forecasts, business surveys in Scotland signal that business optimism, on balance, improved last year but remains moderate. Independent GDP growth forecasts for 2018 range between 0.7 per cent and 1.4 per cent, this broad band of outcomes largely due to Brexit uncertainties.

For the UK, several independent forecasts have been nudged up. PricewaterhouseCoopers, for example, is now forecasting growth of 1.6 per cent next year against the OBR’s 1.3 per cent. It’s hardly an excuse to throw a party, but at least the direction of travel is better than had been feared. And the long delayed arrival of spring weather after one of the coldest and most prolonged winters in recent memory should help spur catch-up activity in construction and distribution as well as high street footfall and consumer spending.

Labour market figures remain buoyant across the UK with the employment rate hitting a joint record of 75.3 per cent in the three months to January, though in Scotland the figure slipped by 0.2 per cent to 74.8 per cent – still high by historical standards.

On house prices, the latest monthly data from Registers of Scotland show the average price of a property in Scotland in January rose 7.3 per cent to £148,512 compared with 12 months ago. This compares with a UK average of £225,621, up by 4.9 per cent on January last year.

And latest research from Savills, estate agents of choice to the well-heeled of Morningside and the Posh in Perth, claims that Edinburgh’s residential property market saw higher levels of growth than any other UK city last year.

The firm’s presentation at the Edinburgh International Conference Centre put the average house price gain in Scotland’s capital at 10.2 per cent, reaching a record £285,000.

In what seemed a personal contribution to National Happiness Week, Savills’ Faisal Choudhry said Scotland has witnessed its strongest market since 2007, with price growth now outperforming London. “The lack of supply and strong domestic and international demand for property in the capital is one of the main reasons behind a rise in prime values in Edinburgh City.”

Finally, retail sales data for February broke a disappointing recent run of months, with volumes rising by a better than expected 0.8 per cent. This was 
well above the average 0.1 per cent increase over the previous six months, although it left annual growth unchanged at January’s 1.5 per cent. Food sales were the predominant driver of February’s rise, up 1.2 per cent month-on-month.

So: shards of hope, if not an outbreak of untrammelled optimism. But even here, caution should be the guide. Business confidence is being held in check by fears of an international trade war as China threatens retaliation against US President Donald Trump’s stated intention to impose tariffs. Brexit uncertainties are also likely to dominate for the foreseeable future.

And lurking overhead is a long expected further rise in interest rates. Last week the Bank of England left the door open to raise UK rates in May after making no change this month, holding them steady at 0.5 per cent. The Bank’s Monetary Policy Committee said “ongoing tightening” was likely to be needed to return inflation back to the Bank’s two per cent target.

Encouragingly, the latest figures show consumer price inflation fell to 2.7 per cent in February, down from three per cent the previous month and the lowest figure since July 2017. And with growth fairly weak, too sharp a yank on the interest rate lever could inflict an unnecessary slowdown.

Looking further ahead, the concern across business and government is of an international slowdown and potential recession as the cycle turns and the US central bank pushes ahead with further interest rate rises and a clawback of quantitative easing.

Such a slowdown, coinciding with the UK’s Brexit departure date, could constitute a double hazard for the UK economy. Any bubbling fizz left over from National Happiness Week should thus be stored in a bottle and kept firmly corked.