Bill Jamieson: Mind the growing gap between north and south

More than half of Scottish tourism businesses are confident about the next 12 months

It’s been easy to shunt this off as a consequence of Brexit uncertainty, or the slump in the North Sea sector or the slowdown from the hectic pace of growth in construction.

But none of these fully explains why a gap in performance is now broadening – and why Scotland has not enjoyed the same degree of economic resilience as the rest of the UK from the “shock trough” of the EU referendum result last June.

There’s growth of sorts – a pulse if you hold it lightly by the wrist. But the latest figures show how weak it is. Scottish government figures show the economy in Scotland grew by just 0.2 per cent in the third quarter of last year, marking time on the equally low April-June quarter. Over the past four quarters growth has been a mere 0.7 per cent. This compares poorly with UK growth of 0.6 per cent in the third quarter and 2.3 per cent over the past year.

Divergence is also evident in labour market data. The latest figures show unemployment in Scotland rose to 5.1 per cent in the September-November period, while in the UK as a whole it fell to 4.8 per cent.

It’s not contraction, certainly, and there is a degree of confidence. According to the latest Scottish Chambers of Commerce survey, business optimism is “finely balanced across all sectors and was marginally positive in all sectors other than Financial and Business Services. Broadly positive trends in recruitment remained but cash flow was tightening across most sectors.”

Construction reported a positive trend in both total contracts and sales revenue in the fourth quarter, led by growth in private commercial contracts. Employment continues to grow in the sector but there are expectations of a dip in investment.

Financial and business services saw a marginal growth in sales but the pace of the increase in investment slowed. Expectations of a growth in employment in the sector in the fourth quarter did not materialise. Optimism returned to manufacturing in Q4 as the sector reported its strongest trend in new orders since the second quarter of 2014. Export orders remained strong but the trend was lower than expected. Retail also saw a return in optimism as the growth in sales met expectations, but a decline is expected in the first three months of this year.

SCC chief executive Liz Cameron said: “Scottish Government actions must be aimed squarely at increasing this rate of growth and utilising the powers at its disposal to support businesses, giving them the edge over businesses in other parts of the UK and enabling them to grow.”

It’s all so tepid: less forging ahead than clinging on: a death by slow increment. And as if this was not concerning enough, other measures suggest that the divergence is even more marked.

Economist John McLaren has devised a measure of the underlying health of Scotland’s economy. His active economy construct excludes elements that can be either difficult to measure or lumpy and erratic. It removes public services (like education, law and order and health) and financial services, both of which are difficult to measure in terms of outputs. It further removes more capital intensive industries, including construction, energy and mining, together with the real estate sector.

This may seem to be overly restrictive and leaves the basic elements of private sector activity. But on this underlying measure, Scotland’s performance is even worse, contracting by 0.1 per cent in the fourth quarter of last year and by 0.2 per cent over the past year. Indeed, since the end of 2013 the “Active Economy” measure has grown by only 2.3 per cent in Scotland, compared with more than 11 per cent for the UK.

Much of this underperformance, says McLaren, is due to the sluggishness of private sector services in Scotland. During 2014 and early 2015 this weakness was largely disguised by rapid growth in construction. However, a return to more normal levels of output means that construction is now detracting from overall economic growth in Scotland.

“The latest Scottish GDP figures are grim,” he concludes. “Not only was Q3 bad but Q2 has also been revised down.

“This continues the longer term sluggish performance of the Scottish economy over the past three years relative to the UK. It is private sector services that remain at the root of the problem and neither the Scottish nor the UK government appear to be able to do anything about galvanising them.”

With Scotland’s economy growing at about a third of the rate of the UK as a whole, little wonder a mood of concern and impatience is evident across the business community. This is all the more marked when the focus of the SNP administration has been mainly on the twists and turns of the Brexit debate – and using every opportunity to repeat its call for a second referendum on Scottish independence.

And the exceptions are not heartening for business – the pursuit of higher tax on “wealthy” Scots and shifting spending priorities across the public sector – and are about as relevant an activity for lifting economic growth as arranging the deck chairs on a slowly sinking Titanic.

Little by way of improvement is expected this year. But there are some hopeful spots amid the gloom. The North Sea oil sector now looks past the worst, with sentiment helped by the recovery in the oil price from below $30 a barrel a year ago to $55.

Exporters should certainly enjoy a fillip, particularly in the food and drink sector. And it should be a better year for tourism, helped by the fall in the pound: Office for National Statistics figures last week showed foreign visits to the UK rose 1.5 per cent year-on-year in the third quarter of 2016, led by an increase of 10.5 per cent from North America. Estimated earnings from all visits to the UK in the third quarter were up three per cent, led by a 17.5 per cent increase in spending from visitors from North America to £1.4 billion. And according to a Scottish Tourism Alliance poll, more than half of Scottish tourism businesses are confident about the next 12 months.

But for overall uplift, we need to see much more.