Bill Jamieson: Blaming Brexit won't solve two nations enigma

Three questions are set to dominate the annual 'state of the nation' conferences and seminars this spring: why is Scotland's economy markedly underperforming the UK? Is this set to persist for years? And does it really matter?

Recent data provides some comfort. Scotland’s jobless total fell by 1,000 to 112,000 in the three months to November. Our unemployment rate at 4 per cent is below the UK figure (4.3 per cent). And some 97,000 more people 
are in jobs compared with the pre-recession peak in Scotland’s economy and labour market. Youth unemployment and female employment rates also continue to outperform the rest of the UK.

Scotland’s international exports excluding oil and gas rose by £460 million to £29.8 billion in 2016 (the latest year for which figures are available), a £105m fall in exports to the EU (£12.7bn) more than made good by a £565m (3.4 per cent) rise in exports to non-EU countries to £17.1bn.

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And despite all the apprehension over a Brexit recession, Scotland’s economy grew by 0.2 per cent in the July-September quarter, taking the 12-month growth rate to 0.6 per cent. It was, said Scotland’s Economy Secretary Keith Brown, “particularly heartening” to see services continue to expand, and production up by 1.2 per cent, with a return to growth for manufacturing.

But take a closer look. Scotland has a persistent labour inactivity rate of more than 21 per cent – and this when the ONS reports the level of vacancies across the UK at 810,000. With many companies reporting shortages of qualified labour, this, says Scottish Chamber of Commerce chief Liz Cameron, requires a sharp and urgent improvement in our skills and youth training.

Nor is our export performance without flaws: the figures show exports to the rest of the UK in 2016 fell by £4.4bn or 8.8 per cent.

But the most searching questions relate to our GDP performance. That 0.2 per cent third quarter growth is half that of the UK’s 0.4 per cent. And Scotland’s 0.6 per cent annual growth compares poorly with 1.7 per cent growth across the UK as a whole. Our GDP per person, which shows economic growth after taking population changes into account, was flat at zero per cent.

Overall, our growth rate has been slow for almost three years. Construction was down for a seventh quarter running, with a 2.9 per cent fall in the third quarter and down more than 12 per cent from its peak two years ago. In GDP per capita (standard of living) terms, Scotland, notes independent economist John Mclaren, has now experienced ten quarters without growth compared with a rise of 3 per cent for the UK over the same period. Our manufacturing output has fallen over the past two years by 2.5 per cent, compared with growth of over 4 per cent across the UK. And services growth in the latest quarter is disappointing, at just 0.2 per cent, due to a lack of any growth in the “Business Services & Finance” sector.

Fraser of Allander director Professor Graeme Roy describes our performance as “fragile and below trend… The figures once again highlight divergence in performance across industries in Scotland”.

Why this marked underperformance compared with the rest of the UK? On construction, ministers point to a return to “normal” after the marked bulge in activity in recent years with major projects such as the Queensferry Crossing and road and rail contracts. The disappointing performance of finance and business services may well reflect political uncertainty, in particular Nicola Sturgeon’s attempt to use Brexit as a reason for a second independence referendum.

As for Brexit itself, the latest “State of the Nation” report by chief economist 
Dr Gary Gillespie quotes (in a highlighted panel) Bank of England forecasts, the “central scenario” of which sees a potential reduction or deferral of business investment in Scotland of £1bn by 2019; an increase in unemployment of around 0.8 percentage points by 2019, equivalent to around 21,000 fewer jobs; lower GDP growth “by around 0.3 percentage points (“cumulative impact over 2018 and 2019, equivalent to around £200 per household in Scotland”). Woeful indeed. But it seems to suit the administration politically to embrace such analysis without question.

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Yet the reality does not concur. Fourth-quarter UK GDP has come in at a higher than expected 0.5 per cent – the best performance since the fourth quarter 
of 2016. Growth across 2017 hit 1.8 per cent – a better performance than had been widely expected at the start of the year.

Last week, Bank governor Mark Carney said UK growth forecasts for this year were now likely to be moved up, and the overwhelming body of data thus far suggests the “Brexit effect” on the economy has been nowhere as severe as forecast in 2016. In this assessment he echoed the view of former Treasury minister Lord O’Neill that Brexit was not our biggest problem and that growth forecasts will be upgraded.

And last week former prime minister David Cameron was overheard at Davos remarking that Brexit has “turned out less badly” than he thought it would (note: no apology or contrition offered for those dire Treasury forecasting errors at the time of the EU referendum).

While Brexit effects are frequently described by Scottish ministers as “devastating” and “disastrous”, there is little explanation as to why performance now appears better than forecast or why Scotland should suffer more than the rest of the UK.

And of course all this matters, for the debilitating effects the official narrative has on business confidence and investment.

How long is this likely to persist? If 
the Scottish Fiscal Commission’s forecasts turn out to be accurate, McLaren points out, “then we can expect growth of under 1 per cent to continue for another four years after 2017”. Condemned to perpetual rigor mortis? Really?

All this leaves the forthcoming crop of conferences this spring on “Whither Scotland” with searching questions to ask of official explanations thus far. The Holyrood political rhetoric of blaming it all on Brexit or “Westminster austerity” is worn through. And greater policy attention on the deeper problems of Scotland’s economy is now surely urgent.