Comment: On course to grow more than 3%

The Bank of Scotland is expected to reveal its latest PMI report showing business activity rose at its fastest pace in three months
The Bank of Scotland is expected to reveal its latest PMI report showing business activity rose at its fastest pace in three months
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COULD Scotland and the UK now be on course for the fastest rate of economic expansion for seven years, with further strong advances in employment, investment and business expansion?

Amid the latest ferocious exchanges of statistical gunfire over the independence referendum – plunging North Sea oil revenues, evaporating fiscal surpluses and fearful fiscal deficits in an independent Scotland – in the real world of here and now, both Scotland and the UK could be on course for even stronger growth than already forecast.

The talk now is not just of the rate of expansion hitting three per cent, but surging to 3.5 per cent – both for this year and for next.

The latest forecast from Michael Saunders, chief UK economist at Citigroup, is that 3.5 per cent growth is now firmly within sight. What gives this salience is that his above-consensus projections over the past two years have proved consistently right. Other major forecasting groups have been struggling to play catch-up as the upturn has deepened and broadened. Nor does the surprise slowdown in manufacturing activity in May much alter this benign scenario.

Consensus forecasts for UK growth, Saunders writes, “remain markedly too low. We still look for GDP growth of about 3.5 per cent in both this year and 2015”, versus the consensus of three per cent for 2014 and 2.6 per cent for 2015.

“We would not be surprised” he adds, “if ONS data revisions eventually show that GDP growth this year is running at about 4 per cent year-on-year.”

The Citi forecast caps a string of upbeat assessments and survey data over the past week. For Scotland specifically, there was a heartening analysis by accountancy giant PwC. It projects GDP growth in Scotland will pick up from 1.6 per cent to around 2.8 per cent in 2014. The figure is marginally higher than the Fraser of Allander forecast of 2.4 per cent for 2014, released only last month.

Paul Brewer of PwC said: “These latest figures, alongside those from Fraser of Allander earlier this summer, are welcome signs that the Scottish economy is gathering real momentum.”

Meanwhile, the latest quarterly survey by Deloitte of finance managers provided more evidence of the strength of UK growth, and that the expansion has made the transition from the initial stimulus of a lower savings rate to rapid growth in hiring and business investment. The readings for the expected growth in corporate revenues, operating margins, discretionary spending and operating costs results are all the highest since the survey began in mid-2007. “All this reinforces our view that the UK economy will continue to grow rapidly – probably well ahead of consensus for 2014 and 2015.”

Also out last week was the services sector Purchasing Managers Report showing continued strong expansion last month. Following on from stronger PMI surveys for both manufacturing and construction, the UK economy, says Global Insight economist Howard Archer, “seemingly continues to motor along at a pretty fast clip”.

And tomorrow, the Bank of Scotland is expected to reveal its latest PMI report showing that business activity rose at its fastest pace in three months as manufacturers and services firms alike recorded accelerated expansions in output. Firms are upping their rate of job creation to accommodate stronger inflows of new work.

How might this benign economic news affect the final approach to the independence referendum? While it is unlikely that Scotland will exactly match the performance of the UK in terms of GDP performance – Scotland having a larger public sector – it would be surprising if we were not to see a further upward nudge in the growth pace assuming the UK’s performance continues to improve. This could work to boost confidence and assure voters that Scotland could afford to opt for independence without the economic sky falling in. And there has been little evidence so far that the much-cited “uncertainty” caused by the referendum has had an aggregate impact on Scotland’s economic performance.

However, any further improvement in performance could work to undermine the SNP’s argument that Scotland is being “held back” by the Union and could encourage voters to stick with the current arrangements as employment and expansion continue to improve. If it ain’t broke, why fix it?

The latest Citi assessment takes issue with the consensus view with its implication that consumption growth will flatten off amidst modest real income growth, while the investment recovery will be limited and delayed.

“By contrast,” says Saunders, “we look for consumer spending of three per cent plus in both 2014 and 2015, with double-digit investment gains.

“The recovery is fuelled by cheap money and the reduction in prior headwinds from balance sheet repair, fiscal drag and the EMU crisis. The private debt/GDP ratio has fallen markedly in recent years and (due to ultra-low interest rates) interest service burdens are very low. Corporate balance sheets in particular are in terrific shape overall.

“Moreover, the UK has substantial supply-side advantages, being an EU country with a high level of inward FDI, relatively low corporate tax rate, flexible labour market and (after a sharp drop in real wages over recent years) labour costs levels that are similar to Spain and roughly a third below those in Germany and France.

“As a result, the UK probably is a relatively attractive country by EU standards for international companies to hire staff and invest. “

The big caveat, of course, is a likely hike in interest rates towards the end of the year – though recent indications from the Bank of England suggest a long, slow climb back to rate “normality”.

So to the question, “Might we reasonably expect the economy to grow by well over three per cent this year?” the answer, unthinkable barely a year ago, now seems not at all so fanciful: “Yes we can”. «