Comment: Difficult to spot light of recovery
All this came with markedly downbeat forecasts as recovery took hold. Amid the gathering light, FoA boldly guided us with a lamp of encircling gloom.
So it was heartening to read its latest quarterly assessment. To say it is hailing the evidence of recovery puts it too strongly. But it has raised its economic forecast to heights that a year ago it would have dismissed as the demented frothings of a crystal ball crone. It’s growth projection for 2013 is hiked from 1.3 per cent (made only last October) to 1.7 per cent, and for the current year from 1.8 per cent to 2.3 per cent.
In percentage terms the 2014 forecast is 28 per cent higher than the one given six months ago, while the 2013 projection is no less than 31 per cent higher. Even in the febrile world of economic forecasting, this is some adjustment. Were the FoA an archery team at the forecasting Olympics you might be well advised not just to stand clear of the target but to give the field it stands in a wide berth.
All this might be dismissed as an unlucky shot, the wild throw to which we are all occasionally prone. But this is no freak error. It flows directly from a mechanistic set of FoA assumptions about the nature of growth, its components and drivers. From the outset it has never believed economic recovery would be possible without a sharp uplift in government spending. And even now, with the economy performing above its long-term trend rate and business confidence surveys signalling a broadening out of the recovery across manufacturing, production and construction, the FoA is still not convinced.
Its appraisal continues to accentuate the negative. Surely the 92,000 surge in Scottish jobs and the fall in unemployment to 7.1 per cent compared with 7.2 per cent would be embraced as good news? Not in the FoA’s strychnine view: “The employment ‘recovery’ (note its use of quotation marks) continues to be driven by an increase in part-time work and self-employment, although this may now be starting to moderate.”
And despite those raised economic forecasts, “the institute has concerns at the unbalanced nature of the recovery as between: consumption versus investment and trade drivers; manufacturing versus services growth; differential growth across UK regions and divergences within the labour market … the current largely consumption-driven recovery may threaten growth into the medium term unless accompanied by stronger investment and export growth … There is a strong argument for the Chancellor to increase government spending on capital investment …”
On and on and on. Even with the UK showing the fastest growth of any G7 economy, the FoA is in no mood to retreat. It is manning its battered barricades to the last bullet and Molotov cocktail. There may be something almost noble as it peers over the smoking rubble of its previous appraisals. There is no sense of defeat, still less a white flag of surrender, but a grim fatalistic stand, not so much Fraser of Allander as Fraser of Alamo, stuck in the last Keynesian ditch.
How ironic, and how unfortunate as it fights on, that construction output posted a healthy 1.8 per cent month on month in January after a 2.0 per cent increase in December; that manufacturing is performing well in the first quarter of 2014 and is on course for further healthy growth, and that business confidence in Scotland has risen above the UK average to stand at a record high. How it must hate those Bank of Scotland employment surveys showing growth in hiring and now in salaries. The cycle has turned. FoA just can’t see it through its Stygian gloom. If there’s a light bulb left at the institute, someone should try switching it on.
Its analysis has tended to underplay the effects of ultra-low interest rates and quantitative easing, the impact of record levels of employment on domestic spending and the growth and vibrancy of the small business sector, some of which tends to fall below the radar of official statistics. Business formation has been rising and the number of businesses in Scotland is now at a record.
These points notwithstanding, some of its analysis rings true and there are worthwhile points for policy. The recovery, while broadening, is not as balanced as it should be. There are regional growth inequalities to address. It says there is a strong argument for the Chancellor to increase government spending on capital investment and to introduce accelerated capital allowances. Many in business have been calling for just this. There are also problems with productivity. And there is a worrying problem over exports and the trade figures.
Few would disagree with its view that to sustain growth over the longer term, an increase in investment and net exports as well as manufacturing and construction activity is needed.
But this is critically dependent on business confidence, a recovery in bank lending to business and an assurance that taxes on employment and business will be kept low. And that in turn depends on government spending being sufficiently constrained to enable a continuing reduction in the budget deficit, leading to a fall in total public debt.
Finally, it would be mistaken to assume that the recovery so far is debt-fuelled – companies are awash with cash – or that the upturn in housing activity will continue unabated. The Royal Institution of Chartered Surveyors reports that the “furore” in the UK housing market is dying down with the increase in would-be buyers at its lowest point in almost a year during February.
And north of the Border, Faisal Choudhry, head of Savills Research, reports that while numbers registering with Savills to buy north of the Border has doubled, there was gathering anecdotal evidence that uncertainty over the independence referendum is becoming a concern to some buyers and sellers.
Overall, more light on the positives at FoA would show up the negatives more strongly.