The compelling need for a reset is obscured by the intensifying party political battle over the next four weeks as the general election approaches. For the moment, the war over constitutional politics holds sway. But after 8 June, some hard truths will come to the fore.
The first reminder appears deceptively benign. The UK economy overall is performing better than first quarter data seemed to indicate. Growth in Britain’s service sector hit a four-month high last month. Markit’s Service Sector Purchasing Managers Index (PMI) jumped to 55.8 in April, up from 55.0 in March – the highest reading this year.
This signals stronger growth last month in the dominant sector of the UK economy. Markit says service sector firms enjoyed “a sustained rebound in business activity during April, supported by the fastest upturn in new work so far in 2017”.
Job creation also hit a four-month high, as companies struggled to handle the increased demand. Service sector bosses are also confident about growth prospects over the next 12 months, Markit adds.
This was not the only sector to report better news. The Purchasing Managers Report for UK construction showed activity at a 2017 high in April. The sector now looks on course for a modestly improved contribution to UK GDP growth in the second quarter after growing just 0.2 per cent quarter-on-quarter in the first three months of the year. The survey showed construction activity improved to a 2017 high after being at the equal lowest level in March (with January) since August 2016. Overall activity in April was led higher by civil engineering activity which was at a 13-month high. Additionally, housebuilding activity improved to a four-month high. Orders growth improved to a four-month high in April, having been stable in March at the weakest level since last October.
Meanwhile, the Markit PMI survey for manufacturing jumped to a new three-year high last month – “a serious upward surprise”, according to Global Insight economist Howard Archer. It not only showed marked improvement in output, but also a sharp pick-up in domestic orders led by the investment and intermediate goods sectors. New orders growth rose to a 39-month high while export orders improved to a seven-month high, supported by the competitive pound and global demand.
Even allowing for the caveats about one month’s set of figures and benign April weather, this is encouraging news. But the problem for Scotland is that in the recent past these upbeat UK surveys have not been as strongly echoed north of the border.
Indeed, on the latest available data from the Scottish government, Scotland’s economy has been seriously under-performing the UK as a whole. Output in the fourth quarter showed a fall of 0.2 per cent, with government statisticians predicting growth of just 0.4 per cent in 2016 as a whole. Independent forecasters see little prospect of improvement for the foreseeable future. The latest Markit data serves only to deepen the questions as to why Scotland has been under-performing so badly.
The second reminder is no less worrisome. Last week the oil price hit a five month low amid concerns over a worldwide oil glut. The price of Brent crude dropped below $49 a barrel, its lowest level since oil cartel OPEC struck a landmark deal to cut output. Recent statements from non-OPEC member Russia has raised doubts as to whether it would continue to go along with the cuts.
Meanwhile, the latest weekly data showed US crude oil stocks fell by just 930,000 barrels against an expectation of a 2.3-million-barrel fall.
All this deals a blow to hopes of a continuing slow recovery in North Sea oil related activity and pushes Scottish government hopes of an oil price recovery back up to $100 well into the future. Any re-run of the independence referendum would have to contend with an altogether different set of assumptions about North Sea related economic activity and government revenues from oil production.
So for these two reasons alone, economic policy in Scotland merits a searching review this autumn. Over the past year there have been growing signs that the SNP administration’s relations with the Scottish business community have become frayed. Are we doing enough to encourage business investment and expansion? Should lower business rates rather than further cuts in corporation tax now be the priority, as the Scottish Chambers of Commerce now argues?
How can local authority Business Gateway services be augmented and improved? Are our skills and investment agencies performing to best effect? And, not least, how can the quality of the government’s economic data be improved? Both Audit Scotland the Scottish Fiscal Commission should be tapped for advice.
Nor should such a review overlook the need to encourage the UK government to consider more radical proposals such as a cut in taxation to ease the cost burden on businesses and provide a boost to consumer demand. Scottish Chambers, for example, suggests a temporary cut in the main rate of VAT and reducing VAT permanently for our hospitality businesses.
The UK government, it says, “must look to reinvent the way it serves Scotland, with the Scotland Office opened up into an accessible route to accessing the range of services available from the UK government; better direct support from the Department for International Trade; and full integration and co-operation between the Scottish and UK governments in developing a new UK-wide industrial strategy.
“Politicians of all parties must remember that it is Scotland’s businesses that are the creators of jobs, wealth and growth in our economy.”
Bruising though the June election will prove to be, there is an opportunity here for an economic policy reset – and one which businesses large and small across Scotland will surely warmly welcome.