Bill Jamieson: Brexit pea-souper gets in Chancellor’s eyes

We are still navigating the treacherous rocks of EU withdrawal. Photograph: Getty/iStockphoto
We are still navigating the treacherous rocks of EU withdrawal. Photograph: Getty/iStockphoto
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A curse on the words “Brexit uncertainties”. Roll on the day when this exasperating phrase is behind us. No business commentary or economic forecast can be relied upon as the endless wrangle over Brexit has brought utter confusion as to what lies ahead.

The latest State of the Scottish Economy report from Dr Gary Gillespie, chief number cruncher at St Andrew’s House, might as well be covered by a sheet of frosted glass. He can’t see out, and we can’t see in because of the Brexit fog. And if you think he is frustrated, imagine what it is now like for tens of thousands of businesses where forward planning has become almost impossible.

Business morale is floundering, with the latest Industrial Trends Survey from CBI Scotland warning of worsening prospects for Scottish manufacturing. Changes in business sentiment, it notes, are mirrored in a downturn in activity, with both domestic orders and export orders falling on the quarter – with the latter declining for the first time in two years.

While export orders are expected to return to growth in the coming quarter, domestic orders are set to continue falling. Political and economic conditions abroad were identified as the factor most likely to limit exports over the coming three months – reaching its highest level since July 1983.

Business confidence was dealt a further blow last week when a report from the National Audit Office bemoaned our lack of preparedness for a “no deal” outcome. It forecast queues and delays at airports and ferry terminals, disruption to supplies of key goods such as medical supplies and imported food, and a deluge of problems for “just-in-time” manufacturers facing production chaos as vital components are held up in vast lorry parks.

Earlier this month, Prime Minister Theresa May announced plans for a “festival of Brexit Britain” earmarked to cost £120 million. “Just as millions of Britons celebrated their nation’s great achievements in 1951,” she opined, “we want to capture that spirit for a new generation, celebrate our nation’s diversity and talent and mark this moment of national renewal with a once-in-a-generation celebration.”

Should there not also be a Scottish equivalent, kicked off with a massive bonfire of Dr Gillespie’s forecasts to herald a new era of clarity for the economy? Were it not for the Brexit fog, his latest assessment could be seen as upbeat. Scotland’s economy continued to strengthen in the first half of the year, with annual GDP growth the strongest since 2014 – and above the UK as a whole.

Independent growth forecasts, he adds, suggest growth could strengthen further over the next couple of years. However – a word seldom absent these days from any prediction – “uncertainty relating to the form and timing of agreement for leaving the EU remains a key concern for many sectors of the economy. This may lead to greater volatility as companies consider investment plans over the coming months to protect supply chains and identify alternative routes to service customers.”

Of particular concern is the effect of emergency stockpiling: this could result in a temporary 0.4 per cent fillip to growth, but with a downturn thereafter that would more than cancel out any earlier benefit.

However, for now the labour market continues to perform strongly with unemployment falling over the past year and remaining close to its record level. Over the year to June-August, the unemployment rate fell to 3.9 per cent, remaining close to its record low of 3.8 per cent in 2017.

Not only did the economy strengthen across the first half of the year but the three months April-June also recorded the strongest growth since 2014. GDP in Scotland grew 0.5 per cent in this period compared with growth of 0.4 per cent in the UK as a whole.

The expansion over the quarter was seen across all sectors with positive growth in services, construction and production.

Exports have grown handsomely on the back of the weaker value of sterling and stronger global growth. Recent HMRC data shows that Scottish exports of goods grew 7 per cent in cash terms over the past year. In addition, the stronger outlook for the oil and gas sector alongside the notable rise in the oil price has provided a boost to confidence and activity through its supply chain and in the wider economy.

Independent GDP growth forecasts for 2018 range between 0.7 per cent and 1.3 per cent, strengthening slightly to between 0.8 per cent and 1.6 per cent for 2019. But a broader Brexit risk remains, “which if transmitted into a significant fall in household confidence and consumption,” he warns, “could have a material impact on the economy.”

This concern is echoed in the latest UK-wide CBI survey – “disturbing and worrying on many fronts” according to economist Chris French at the EY Item Club. It points to manufacturing activity faltering at the start of the fourth quarter and unsettled by heightened Brexit uncertainties. Skilled labour shortages are also a concern. Both the new orders balance and expectations for near-term output fell back to their weakest level for three years.

Export orders weakened in October. Furthermore, manufacturers are the most pessimistic about export prospects for the year ahead since mid-2012. The quarterly survey showed a sharp fall in manufacturers’ confidence and a further significant reining back in manufacturers’ investment intentions. Manufacturers are reportedly cutting back on investment in product and process innovation and training and re-training. There is also concern that a lack of available skilled labour will hold back output and constrain investment.

This is the backcloth to Chancellor Philip Hammond’s budget tomorrow. Not only is it unlikely he will be able to herald “broad sunny uplands” post-Brexit with only modest upgrades to his previous budget forecasts, but the overall package itself is set to err on the side of caution. Major changes in tax and spending may well be held over for a budget statement in the spring when the outlook will – hopefully – be clearer.

But the problem with a fog as dense as this is that it may take time to clear – particularly if a last-minute Brexit agreement involves a longer transition period with extra time for further negotiations. We could be for the longest fog in Met Office records.