Why Scotland may yet emerge quicker from economic gloom than rest of UK - John McLaren

The International Monetary Fund (IMF) has downgraded its forecast of economic growth for the UK in 2023 to -0.6 per cent. In contrast, it upgraded its 2023 growth estimates for almost all other ‘advanced economies’.

The absolute change is not a great sign, from very slow growth in 2023 to a mild recession. However, the relative shift in economic prospects, compared to the US and euro nations, is even more of a worry.

In general, due to the highly uncertain state of the world, through the war in Ukraine, energy prices, ongoing Covid concerns et al, then such forecasts are liable to fluctuate month by month. Indeed, the Bank of Englands updated forecasts, due on Thursday, are likely to show an upgrade in the UK’s economic fortunes compared to its last forecast, made while the UK was still emerging from the Liz Truss/Kwasi Kwarteng fiasco in early November.

Then again, the Office for Budget Responsibility is expected to downgrade their next forecast of GDP, due in March, as this was made when some degree of stability had returned in mid November.

Economic recovery out of the North Sea could yet prove a boost to Scotland. Picture: Getty Images

But all countries share much of this uncertainty, so why has the UK been singled out for such a large downgrade? The IMF point to “the downward revision from October, reflecting tighter fiscal and monetary policies and financial conditions and still-high energy retail prices weighing on household budgets”.

Expanding on this, the IMF’s chief economist, Pierre-Olivier Gourinchas, said UK consumers were particularly exposed to high energy prices and highlighted the tight UK labour market, where, unlike other countries, the labour force remained smaller than in pre-Covid times.

Some of this pessimism can be put down to poor historic government policies, for example on energy pricing, which are exacerbating the impact of high gas prices. The labour market impact is more of a mystery, although again it has not been helped by the Brexit decision and subsequent negotiations.

Post 2023, the IMF is a little more hopeful, with growth in the UK economy being upgraded, but still under 1 per cent, for 2024, and still slower than for most big euro area economies

The position in Scotland is likely to be similar to that for the UK. One of the main differences could come from the impact of higher energy prices on North Sea activity. If prices stay high then some degree of resurgence may emerge that allows the Scottish economy to outgrow that of the UK.

Indeed, the Scottish Fiscal Commission in December upgraded their outlook for Scottish employment and earnings to be better than those for the UK from 2023/24 onwards. However, such an outlook remains highly conjectural and reliant on both world events and on domestic government policies.

All in all, the IMF report is a reminder that economic conditions remain highly volatile and “the balance of risks to the outlook remains tilted too the downside, with scope for lower growth and higher inflation.”

The extra worry for the UK, and for Scotland, is that domestic policies and international market concerns over the stability of UK fiscal and monetary policy could do even further damage to the economy.

This means that March’s UK Budget becomes another important step in treading a path out of the current morass.

- John McLaren is a political economist who has worked in the Treasury, the Scottish Office and for a variety of economic think-tanks