Bill Jamieson: Easy to miss signs of hope amid predictions of doom and gloom

A crystal ball would come in handy for economic forecasters. Photograph: Getty Images
A crystal ball would come in handy for economic forecasters. Photograph: Getty Images
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Some perfect Christmas gifts you just can’t lay your hands on – no matter the deluge of last minute come-ons from Amazon and others. For Lady Susan Rice, chair of the Scottish Fiscal Commission (SFC), can I lay my hands on a perfect crystal ball with clear views of 2018 and beyond? No chance.

How vexing we can’t find the ideal gifts that would bring cheer not just for Christmas Day, but for years beyond. Instead we have to settle for a single shrink-wrapped Ferrero Rocher from the International Monetary Fund’s Christine Lagarde and an austerity brown Christmas card from the Fraser of Allander Institute.

“Bleak” barely describes the outlook being unwrapped for 2018. A summary list of these lowlights I set out here. But I also highlight some pointers that give grounds for hope that the year ahead need not turn out as gloomy as we are being told.

First, some figures from the SFC, the Fraser of Allander Institute and the UK Office for National Statistics (ONS) by way of icy refresher. Lady Rice at the SFC gave us a dismal 0.7 per cent growth forecast for next year – half the 1.4 per cent forecast by the Office for Budget Responsibility for the UK overall – and with little sign of any improvement for the foreseeable future. Scotland’s economy, she said, will grow at less than 1 per cent a year until 2022 – woefully short of the annual long-term trend rate of growth of 2 per cent. Peer as hard as she could into her crystal ball, there was no white light to be seen.

Lest we thought her eyesight was failing, the Fraser of Allander Institute also took a look at the SFC forecast and highlighted that real disposable household income – our spending power after tax and benefits – was forecast by the SFC to fall for the next five years. It duly reminded us that it’s been falling for the past ten years – the longest period of falling real incomes in modern times on official record.

Then came latest pronouncements from the ONS. UK GDP grew 0.4 per cent in the quarter, unchanged from the previous estimate. It added that UK households’ expenditure had exceeded income for four quarters in a row, suggesting that people are dipping into savings to fund their spending. This, it pointed out, was the first time since current records began in 1987 that this had happened over such a long period of time.

Can’t bring yourself to open any other parcels kindly wrapped for us in the past week? Prepare for Lagarde, the grim-faced Angel of Gloom from the IMF. She warned last week that uncertainty over the Brexit deal was causing UK firms to delay investment plans. She expects UK growth of 1.6 per cent this year, down slightly from its previous forecast of 1.7 per cent. It expects growth to slow further next year, to 1.5 per cent.

She also said rising inflation, caused by the fall in the pound, and stagnant wages were squeezing spending power. “The UK,” she said, “is losing out as a result of higher inflation, pressure on wages and incomes and delayed investment. If you look at investment alone… with the global economy as it is, and the space the UK economy has in that global economy, it should be rolling at 6 per cent.”

However, the credibility of IMF forecasts has taken some knocks. It was forced to make dramatic changes to its growth forecasts for the UK since the Brexit referendum. Immediately after the vote in June 2016, it slashed its forecast for 2017 from 2.2 per cent to 1.3 per cent, with Ms Lagarde famously pronouncing that our prospects were “bad, very bad”.

But in due course the IMF revised its forecasts upwards at the start of this year, before again cutting them back.

Amid all this, it would be easy to miss the sparks of hope. The 0.4 per cent growth figure for the third quarter, though weaker than the final three months of 2016, is better than the 0.3 per cent rate recorded in the first and second quarters. Note also the ONS observation that GDP grew by 1.7 per cent in the three months to September compared to the same period last year, an improvement on its previous estimate of 1.5 per cent growth. It also revised up its business investment forecast.  

Ian Stewart, chief economist at Deloitte, said: “The UK’s performance has been rather better than the gloomy talk would suggest. Growth has come in stronger than expected a year ago and the pace of activity has edged up since July. Overall, growth has slowed modestly, not collapsed. Talk of an end to UK growth has been somewhat exaggerated.”

Might Scotland be missing out? Data last week from Scotland’s chief statistician shows investment in R&D by firms in 2016 was the highest since records began. Business enterprise research & development (BERD) spend was £1.072 billion last year, up by £98 million over the latest year.

Further grounds for hope across the UK came in the December CBI survey released last week. This showed manufacturing has likely posted another strong performance in the fourth quarter of 2017 after being very much the UK economy’s brightest sector in the third quarter.

Robust orders in December bode well for manufacturing output at the start of 2018. Encouragingly, both domestic and foreign demand were buoyant in December, while the strength in orders was also reported to be broad-based across sectors.

On the export side, a still very competitive pound and healthy global trade are helping UK manufacturers compete in foreign markets. The weakened pound also appears to have encouraged some companies to switch to domestic sources for supplies. Significantly, the Bank of England regional agents reported in their November survey of business conditions that “some manufacturers reported increased sourcing from domestic customers”.

For good measure the Bank said the recent progress on the Brexit talks would “reduce the likelihood of a disorderly exit, and was likely to support household and corporate confidence”.

Nor is it all gloom on the government’s finances. Public sector net borrowing (excluding public sector banks) fell by £3.1bn to £48.1bn in the financial year to November compared with the same period in 2016 – the lowest year-to-date net borrowing since 2007.

Dark though the crystal balls may be, they are not without hope.