Fears of economic stagnation and low growth abound, but our resilience has seen us Scots make a good fist of it, writes Bill Jamieson
Look up, look forward and like what you see. Scotland has had a momentous year. The Commonwealth Games, the Ryder Cup, global media attention with the independence referendum and now the prospect of more powers for the Scottish Parliament.
Running through 2014 has also been a constant stream of upbeat figures on the economy, with more jobs, falling unemployment, record numbers in work and a growth performance that’s beaten almost all expectations.
Inflation has stayed low. The spectre of higher interest rates has receded. Investment is up. House prices are rising and a bubble avoided. New house starts are rising and construction is looking up.
Enterprise Minister Fergus Ewing has a good tune to whistle. Scotland now has the highest employment rate, lowest unemployment rate and lowest inactivity rate of all four UK nations. Output has surpassed pre-recession levels and our economy is showing the fastest annual growth since late 2007.
Lest you thought all this good news was all just government statistics, here comes news today showing just how real, deep and widespread the upturn has been in Scotland. A detailed survey of our top 100 private firms testifies to a year of more jobs, higher profits and a surge in turnover.
The Scotland Ltd report from accountants Grant Thornton reveals that Scottish private firms grew total revenue by 9 per cent to an aggregate total now in excess of £20 billion. Employment is up by 12 per cent.
Operating profits are up by almost a third. Indeed, 40 of the top 100 firms recorded double-digit profit growth. All due to yet more leverage? Not so – long term debt has been collectively cut by 38 per cent. And cash levels have risen by 11 per cent to £1.2bn.
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Kevin Engel, managing partner Scotland at Grant Thornton, describes the overall picture as one of “resilience”. But it is surely more. “The Top 100 Ltd companies”, he adds, “may operate across a variety of sectors but they have achieved growth in some of the toughest trading conditions. The overall picture is of increased demand, productivity and confidence. This report provides some fantastic success stories”.
Yet none of this should be happening. In recent years there has settled across the economic world a conviction that we are in a “new normal” of depressed – and depressing – performance. We’re locked in an era of colossal debt, low growth and stagnation.
The message? Get used to it. The pre-financial crisis era of robust growth, rising output and ever improving living standards will not return for many years. Across the UK real household income is barely above the level of early 2008. Indeed, there is a widespread sense that the economy is resting on dangerously thin ice.
Might not the heavy thinkers have got it wrong about the “new depressed normal”? Might they have forgotten that progress, economic and social, has never been linear but has always proceeded in cycles? That at the top of every cycle there is irrational exuberance and at its low levels a despair that good times will never return?
There is a wary apprehension of the future, a sense that this upturn is not just fragile but resting on false foundations.
There are three reasons for this anxious mood. The first and most immediate is the deeply uncertain political outlook – both here and at Westminster. The cry for “more powers” follows on a ferocious referendum campaign that raised expectations not just of protected public spending but of progress towards “fairness”, “greater equality” and “well-being”. Scotland must have more powers over spending and tax. But spending and tax for what? Those running a business cannot but feel vulnerable as to who speaks for them, and what priority is being given to growing the economy rather than just picking its fruits.
At Westminster there is every prospect of a hung parliament and fractious political gridlock. That is unsettling in itself. But it also coincides with perilously high levels of public deficit and debt. Minority governments and tentative coalitions will not be able to spend their way out political trouble.
As it is, further spending constraint lies ahead. Any doubt on this score is set to be firmly removed by chancellor George Osborne’s Autumn Statement on Wednesday. The government is missing its target for deficit reduction this year and Public Sector Net Debt continues to grow – and with it, annual debt interest. This financial year alone, debt interest payments are set to top £52bn, on its way to £68bn in 2017-18, sucking ever more money out of Treasury coffers.
That is the reality behind yet more public spending constraints and little if anything by way of tax giveaways. For consumer-facing businesses and those dependent on government contracts, it is going to be tough as far ahead as we can see: government spending was a major contributor to GDP growth while net trade was strongly negative – hence the fears of a depressed, and depressing, “new normal”.
But there is a third layer of apprehension. It is that economies around the world are struggling to make headway. Japan, despite massive levels of quantitative easing (QE), has slumped back into recession. Europe is teetering on the brink of a recession relapse, with talk this week of a €315bn (£249bn) “New Deal” plan to pull the EU out of economic slump. We are close to testing to destruction all the traditional levers of fiscal and monetary stimulus.
There are deeper and more intractable problems that lie behind these grim warnings of secular stagnation. They reflect concerns over the effects of a tougher regulatory regime for finance and banking in particular. Much of the Bank of England’s QE has ended up on the balance sheets of the banks rather than being lent, while companies are much more wary of committing cash. According to Capita Asset Services, the UK’s largest companies by market value are sitting on cash piles of more than £53bn, more than two-fifths higher than the amount of net cash they held last year.
With little by way of a demand boost through rising household incomes and wariness over the speed and scale of profit-disrupting technological change, there is a wariness to commit. This is bearing down on bank lending, business investment and innovation.
Yet as the Grant Thornton report shows, we are capable of confounding the gloomy forecasts. Looking forward, recent falls in the oil price should help. A modicum of political stability would be even better. Best of all would be resilience of the type we have seen in 2014 for 2015 to have a fighting chance.
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