Bill Jamieson: Another brick in the recovery wall

No real rise in living standards yet, but the economy as a whole is surprisingly healthy, writes Bill Jamieson

Rising confidence has meant a rise in building, hence the reports of shortages of bricks. Picture: Getty

Little wonder we’re running out of bricks. Both north and south of the Border, the economy is going like a train. Output in Scotland is up 1 per cent on the quarter. It has now crossed its previous peak to stand 0.4 per cent above its pre-recession level. Numbers of Scots in work have risen 76,000 over the March-May period – the longest ever unbroken run of increasing quarterly employment. We have now hit an all-time employment record of 2.59 million.

As if this was not enough, the latest Bank of Scotland PMI survey earlier this week showed private sector activity in Scotland expanded for the 21st consecutive month in June. Other survey data show activity is up across services, production and construction sectors. Indeed, so strong has been the upturn in demand from builders that we’ve now hit a brick crisis. Scotland’s last remaining supplier, Raeburn Brick of Blantyre, is struggling to keep up with the flow of orders.

Sign up to our Opinion newsletter

Sign up to our Opinion newsletter

Anyone who forecast these opening paragraphs two years ago would have been dispatched by ambulance to a residential clinic deep in the country and made to lie down in a darkened room until the fever subsided. Indeed, such has been the pace of growth that most economic forecasters have been left behind and are panting to catch up.

Even last month’s Fraser of Allander forecast for 2014 of 2.5 per cent growth for Scotland – already raised three times in succession – looks like being left behind. Last week, PwC raised its forecast for growth in Scotland to 2.8 per cent. And for the UK as a whole, growth projections now reach beyond 3 per cent. Citi Group economists predict an outcome close to 3.5 per cent – this year and next.

The Westminster and Scottish governments can scarcely contain their glee over the latest ONS statistics and business survey data. Prime Minister David Cameron said the figures showed that more people have the security of a job than ever before, while employment minister Esther McVey said we “have reached a key milestone in our recovery”, citing figures showing a further rise in job vacancies to 648,000 and record numbers of women in work.

And Scotland’s finance minister, John Swinney, lost no time in hailing the figures as “an important stage in our recovery”. Scotland’s GDP growth over the March-May quarter, he declared, was faster than the UK overall, and Scotland’s employment rate, at 73.3 per cent, remains higher than for the UK as a whole. Yes, there was a 13,000 rise in unemployment, but this is largely explained by a 25,000 surge in school leavers. Claimant count figures for June fell by 4,000 to under 100,000 for the first time since 2008.

Why then, if the figures are so good and the uptrend firmly in place, have they failed to lift political fortunes? The Conservatives continue to trail Labour in opinion polls. And why, despite earnest assurances from the SNP that the figures are proof positive of Scotland’s ability to run a successful and growing economy, are they not working to boost support for independence? (Of course, were the figures to show the reverse and the economy headed downwards, the Scottish Government would have lost no time in claiming that this bore out its main critique – that Scotland was being held back by the terrible policies of the Westminster government and only independence would deliver growth.)

One figure in particular explains why voters remain unconvinced by all these happy statistics: when set beside their own life experience, they are, well, just statistics. The main everyday measure of our wellbeing is barely moving. Average earnings, measured by regular pay, rose by just 0.7 per cent over the year – in stark contrast to consumer price inflation which rose to an annual rate of 1.9 per cent in June from 1.5 per cent the previous month. It is taking a lot longer for earnings growth to move above inflation than most had counted on, with a resultant squeeze on household budgets and an increase in reliance on further borrowing.

Why is growth in average earnings so weak when the labour market is tightening? The explanation lies in continuing remarkable changes to the labour market. While skilled workers switching into new jobs are enjoying an earnings uplift, this is a small proportion of the workforce overall, and employment growth has been fastest in low-skill, lower-paid work.

There is also a continuing transformation in employment by type across the UK, with a further surge in the numbers of those self-employed and/or working from home. The latest figures show a record number of people who are home workers, with the total now standing at 4.2 million, or 13.9 per cent of the workforce, the highest since records began in 1998.

By contrast, numbers employed in the public sector have fallen by a further 103,000 in the latest quarter to 5.4 million, or 17.7 per cent of the workforce. While this fall includes Lloyds Banking Group moving out of the public sector, there is little doubt that the growth in self-employment and micro businesses reflects the impact of changes in communications technology with the relative cheapness and ease of digital marketing and trading (“laptop entrepreneurs”) and a preference by many for the flexibility – and opportunity – that self-employment offers.

It is often asserted that these figures reflect the desperation of younger people striving to find paid work and being obliged to set up on their own. But the biggest rise in self-employment has been in the number of older workers. According to the ONS, self-employment among the over-50s is up 36 per cent on ten years ago.

And research by the Resolution Foundation think tank suggests that self-employment seems to be growing as an alternative to retirement. More than half of self-employed people aged 60 or over now work part-time, up from 46 per cent in 2005. Self-employment thus seems to be an option enabling older people to keep earning but by working less. This also works to push down average earnings growth.

Public confidence that the economy really has turned a corner is dependent on a rise in real living standards. That has still to work through and may now have to contend with a rise in interest rates towards the end of the year.

As for its impact on the Scottish independence referendum battle, the latest clear signs of improvement should help lift confidence and our “can do” spirit, but may work to blunt the SNP critique that only self-government could deliver economic growth. Growing warnings from leading private sector companies may also encourage many to stick with an arrangement that is at least delivering more jobs, more people in work and more business confidence.

Debt and deficit constraints will continue to bear down on public-sector activity outwith health, education and welfare sectors. Job losses in unprotected areas will continue. But many more jobs are being created elsewhere. And how quickly we have moved from worries about unemployment and an economy performing below capacity to one fretting about a shortage of bricks.