Bill Jamieson: Still feeling blue despite Brexit bounce

Is Scotland missing out on the post-Brexit bounce? Across the UK both Purchasing Managers Index surveys and official figures point to a pick-up in output, activity and confidence since the 'shock' dip in July. But in Scotland there seems little sign of one.

Whisky is well-starred in the latest Bank of Scotland survey. Photograph: Getty/iStockphoto

There are some exemptions to this general rule – but not many. The latest Bank of Scotland survey released last week of Scotland’s food and drink sector conducted after the Brexit vote found an uplift in business confidence and growth expectations compared with twelve months ago – and in marked contrast to the troubled mood of much of Scotland’s economy today.

The survey strongly suggests that the sector will be able to build on the momentum of recent years, with total food and drink exports now at £5.1 billion. It finds that across the sector, firms expect to increase their turnover by an average of 24 per cent over the next five years. And there are some signs that business confidence in Scotland is recovering after a sharp drop in the summer.

Across the manufacturing, services and consumer sectors, however, evidence of a general recovery in activity and performance is hard to come by. The North Sea oil sector is still wrestling with the collapse in the oil price and a relapse in the summer when it fell to $42 a barrel, though it has since recovered a little to $48.

Retail sales in Scotland are still sluggish, falling by 1.8 per cent in July compared with last year. Yet figures for the UK as a whole for this period showed a rise of 1.9 per cent. Non-food sales faltered, says the Scottish Retail Consortium, because of declines in clothing and footwear despite heavy end of season discounting.

“It is possible”, says the SRC’s David Lonsdale, “that more prolonged post-Brexit blues in Scotland may perhaps have affected consumer confidence and been a contributing factor to the dip in retail sales.” But as he pointed out: “In reality, thus far little has materially changed for most households in the wake of the referendum.”

There are tentative signs that Scottish business confidence has begun to improve. But ahead of the Bank of Scotland Purchasing Managers Index this week, there is as yet little sign that output has picked up across manufacturing and services.

Contrast this with latest UK-wide figures from construction, manufacturing and services. Construction output defied dire predictions of a fall in July and instead held steady. Particularly heartening given the housing shortage was a 25 per cent quarter-on-quarter and 15.8 per cent year-on-year increase in new housing orders.

Across UK manufacturing the latest PMI showed an encouragingly strong bounce in August on the July figure. The manufacturing PMI surged back up to a 10-month high of 53.3 after nosediving to a 41-month low of 48.3 in July. New orders strengthened markedly.

Consumer confidence across the UK saw some recovery in August after its July nosedive. And in the dominant services sector, UK figures showed a strong recovery in August after slumping to a seven-year low in July. The sector’s PMI bounced back well above the crucial 50 mark that divides contraction and growth, with a reading of 52.9.

The month-on-month gain at 5.5 points, was the largest observed over the 20-year history of the survey.

Now add to all this continuing falls in unemployment and the narrowing of the UK’s trade deficit from £5.6bn in June to £4.5bn in July, lifting hopes that net trade will make a positive contribution to third quarter GDP. It is now likely, not just that the UK will avoid that much-feared post-Brexit recession, but also that the third quarter is likely to show that the UK economy achieved growth, albeit modest. Credit Suisse last week doubled its growth forecast for the UK economy while Morgan Stanley has withdrawn a recession forecast.

It leaves some of the hitherto respected forecasters at the Bank of England and the Treasury with much to answer for after their doom-laden warnings. And it poses some searching questions here in Scotland. The evidence suggests that our lacklustre economic performance is not due, as many in the Scottish government continue to imply, to the damaging consequences of being “dragged out of the EU”, but to domestic circumstances prevailing before the vote and which are still bearing down on output and performance.

The First Minister’s £500 million spending boost for business announced last week may help – but it will take time for the wheels of this extra infrastructure spending to grind into action. It is certainly not helping business confidence one jot to manufacture statistics showing a loss of up to £11bn to Scotland’s economy over the next 14 years.

At the least a more searching look needs to be taken at the forecasting methodology, though it is fair to say it was far from alone in the scary prediction business. The Treasury and former chancellor George Osborne were well to the fore. And from Bank of England governor Mark Carney there was no sign of contrition or apology last week, still less any hint that the Bank’s forecasting models might be in need of adjustment.

Instead, the doomsday-warners have riposted that Armageddon was averted only by the prompt intervention by the Bank to cut interest rates and provide another £40bn of quantitative easing. But there is no way of knowing – or at least for some time – whether this boost will work, and since we are now in the eighth year of “emergency” monetary action there is good reason to question whether it will make more difference this time.

Rather more direct action is needed in Scotland to stimulate business investment and expansion than more road improvement works. No-one doubts these are welcome. But as a long-term solution to our growth under-performance we need to look further – and more radically – at tax cutting.