Bill Jamieson: A bruising battle ahead on Scots economy

Finance Secretary Derek Mackay
Finance Secretary Derek Mackay
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So, who’s winning in the Scottish Government’s war of words on the economy – Mike “We’re all doomed” Russell, the Secretary for Brexit, or ‘Wha’s like us’ Finance Secretary Derek Mackay?

Mr Russell would have us battening down for the mother of all storms on Brexit – a Storm Ali with no ending. Mr Mackay exults in figures showing not only that our economic performance is better than expected but also that we are beating the rest of the UK on growth.

Yesterday it was Mr Mackay’s turn to prance round the ring, arms aloft in victory as Doomwatch Russell retreated to his corner to be rubbed down with towels.

Latest official numbers did indeed give cause for some cheer. Contrary to the dire premonitions of ‘Remainer’ warnings, our economy is not, or not yet, cowering in the imminent onslaught of recession.

Initial estimates show that our Gross Domestic Product – not including output from offshore oil and gas extraction - grew by 0.5 per cent in real terms in the second quarter- slightly faster than the UK (0.4 per cent). It was only last month that Scotland’s chief statistician revised growth for the first three months of the year to 0.4 per cent - up from the 0.2 per cent previously estimated.

Construction sector output grew by 1.8 per cent, production by 0.6 per cent and the services sector by 0.4 per cent. Agriculture fell back by 1.2 per cent.

And over the first half of 2018, Scotland’s economy grew by 0.8 per cent compared with the UK figure of 0.6 per cent.

Mr Mackay lost no time in pointing out that Scotland’s growth was both pulling ahead of the UK and outperforming the official growth forecast. But this is by no means a knock-out victory – rather, a one-round ascendancy on points with many more rounds still to go in the Brexit Death or Glory stakes.

“Fantastic”, was the verdict of Scottish Chamber of Commerce chief executive Liz Cameron – stronger growth achieved despite some of the uncertainty surrounding the broader trading environment. “It’s testament”, she added, “to the resilience and innovation of our businesses that Scotland has outpaced the UK this quarter.”

The second quarter improvement owed much to a recovery in construction after the foul weather of the first three months of the year. Figures here still need to be treated with caution due to unprecedently large revisions to previous estimates. It is also a sector notoriously prone to bunching of project intake and completions.

And while the latest figures show Scotland’s performance was better than previously estimated, it was still, as economist Professor John McLaren points out, “disappointingly low”, with an annual average growth rate of 1.1 per cent since 2010 (slightly lower than the pre-revisions figure of 1.2 per cent a year).

“In comparison to Scotland’s 1.1 per cent annual GDP growth rate post 2010”, he adds, “the UK economy has grown by around double this rate, at 2 per cent a year. More recently the performances of Manufacturing, the Business Services sector and the Retail & Wholesale have been a particular worry.”

Now there has been hefty criticism of GDP numbers in the recent past. And there is also a growing question mark over the ability of this GDP measure to capture the dramatic changes being wrought by digital technology in business communication and online trading.

Nor do the figures tell us much about the pace and scale of business formation and changes to the business base. What of business births and deaths during the quarter? What is the experience of business failure, and how does that compare with other nations and regions of the UK?

A model of how such extra data could be provided is Edinburgh City Council’s Quarterly Economy Watch – a useful ‘dashboard’ check on the capital’s economic pulse. In addition to figures on overall economic activity and employment, there is a section on business and investment trends. Though some of the figures are tardy (with latest available figures for 2016), it shows business births and deaths and survival rate comparisons with eight other major UK cities. The data is augmented by figures on foreign direct investment into the capital, and here, too, comparisons with other major cities. In seeking a broader view of Scotland’s economic health, the Scottish government could usefully take a leaf out of Edinburgh’s book.

As for the immediate future, we are now entering truly volatile terrain. A survey this week from the Federation of Small Businesses Scotland shows confidence has fallen sharply and businesses north of the border are amongst the most concerned in the UK about a no deal Brexit.

The Scottish Small Business Confidence Index fell from plus 5.1 points to minus 13.2 points. UK-wide, the Index, which measures business owners’ assessment of business conditions, fell from plus 12.9 points to minus 1.7 points. A separate FSB survey shows that 56 per cent of Scottish businesses believe a no transition, no deal Brexit would impact negatively on their business, compared with 48 per cent across the UK.

And beleaguered retailers face a further blow with the latest Consumer Price Index (CPI) figure, showing inflation now running at 2.7 per cent.

If this holds until next month, when the CPI figure is used to calculate the business poundage rate for next year, as is likely to be the case, Scottish retailers could face an extra £18 million on their annual business rates bill from April 2019. Ratepayers as a whole in Scotland would see a £80 million leap in their rates bills.

Should the Scottish Government not repeat last years’ decision to limit rises to CPI, but instead use RPI (currently 3.5 per cent), that £18 million figure could rise to over £23 million. Scottish businesses also still have to pay a higher Large Business Supplement in Scotland as well, and all ratepayers who operate out of town face the prospect of a new rates surcharge under Ministerial plans.

For all these reasons, Scotland’s economy – and Derek Mackay – face may an altogether more bruising fight in the months ahead.