Bill Jamieson: Mixed blessings of cheap petrol and sterling
On our motorways there seems no slackening in the volume of trucks, lorries and commercial traffic barrelling along. At our airports, little sign of falling passenger numbers. Is it all an illusion? A last blast of normality before a muffling silence descends?
So it seems. Predictions of grim foreboding continue to pile up. Last week brought a warning from one of Scotland’s leading forecasting groups of a sharp slowdown ahead – one that could push us into technical recession.
And of particular concern for the North Sea oil sector and the thousands of engineering supply firms dependent on it, the price of oil, far from building on the rally earlier this year, has fallen back down below $43 a barrel. Some analysts see the price tumbling back below the crisis level of $40. That at least should be good news for industrial energy users, households and motorists – if only the retail price moved down more smartly in line with the crude price.
This latest downturn could make recession in Scotland unavoidable. There would be nothing “technical” about it.
Fortunately, the outlook is far from hopeless. There are encouraging signs to be found despite all the hand-wringing about Brexit effects and the fears of an investment slowdown.
But you’d have to search hard for them in the latest Fraser of Allander Economic Bulletin released last week. It has revised down its growth estimates in each and every year of the forecast horizon, with growth of just 0.9 per cent this year (down from 1.2 per cent previously), 0.5 per cent in 2017 (down from 1.9 per cent), and 0.7 per cent in 2018. Unemployment is predicted to rise to seven per cent next year and “a short ‘technical recession’ – two consecutive quarters of falling output – is highly possible”.
Growth in Scotland is forecast to slow markedly “as a direct result of the EU referendum result, and a prolonged period of economic uncertainty and financial volatility – as the terms of ‘exit’ are negotiated – is now unavoidable. This will carry risks to investment, household incomes and jobs.”
Trade and investment prospects “will be damaged by the decision to leave the EU… Given Scotland’s fragile economic performance over the past 18 months, the impact of the EU referendum result is exactly what the Scottish economy did not need.”
It’s not as if the referendum result interrupted a boom. Over the past year, Scotland’s economic recovery has remained fragile. Zero GDP growth in the first quarter was grim testimony to sharp falls in production compounded by the widely anticipated retrenchment in construction.
Just ahead of the referendum vote there were tentative signs of a modest improvement in the outlook, with business surveys pointing to a rise in expectations for the second half of the year. But the Brexit vote, says the FoA “has turned all of this on its head”. Even though Article 50 has yet to be invoked and detailed negotiations started which could still see the UK remain in the single market, Brexit “will have a detrimental effect on growth”, with some sectors, such as import-reliant construction and retailers, hit hard.
However, just as we brace ourselves for the next wrist-slashing paragraph, the FoA backtracks a little, saying that while the risks are on the downside, “it is important to not overstate them”. This is not a re-run of the 2008-09 financial crisis. This is a lengthy and highly uncertain step change. The fall in sterling and Bank of England stimulus should help dampen the immediate “shock”. Growth is likely to be lower but remain positive on an annual basis.
The analysis may also be underestimating the effects of overseas investment into the UK from the fall in sterling – witness the £24 billion Japanese purchase of Arm Holdings and the decision of GlaxoSmithKline (whose chief executive backed Remain), to invest £275 million to expand its UK manufacturing sites, saying the country remains “an attractive location”.
The FoA analysis also makes little allowance for the recent Bank of England agents’ “business as usual” report on economic activity, the entrepreneurial response to the cheaper pound, and the government’s intention to “reset” fiscal policy in the Autumn Statement.
However, of more immediate concern is the latest downward spiral in the crude oil price. Brent crude fell to a new July low of under $43.50 a barrel last week, sparked by the latest data on US inventories showing a 1.7 million-barrel rise in raw crude stocks. The worry is of a return of the global glut that blighted the market for two years.
Petrol stocks have been surging to record levels while demand remains insufficient to meet the resulting flood of refined-fuel products.
Michael Wittner, the head of oil research at Société Générale, said he believes there is a “soft floor” for oil at around $40 a barrel, but that it is possible it could fall further before hitting bottom.
Analysts at Morgan Stanley say a return of US shale production could prompt a supply excess from August, which would push oil lower. They believe a bottom could yet be found in the mid-$30s.
On the plus side, if this lower price is sustained it should feed through to lower prices at the petrol pumps and on energy bills, helping to relieve the pressure on household budgets. But it also points to further retrenchment ahead for the North Sea oil sector and all those firms dependent on it. And that is troubling.