Bill Jamieson: What the future really holds

FROM: Office of the First Minister

TO: Gary Gillespie, Officeofchief [email protected]

21.12.2011 Confidential

2012 FORECASTS URGENT

Dear Gary,

Please send me soonest a snap summary of what’s likely to be in store for the economy in 2012 – no ifs, no buts, no haverings, so’s I’m forewarned and forearmed. Need this by 30.12. No need for formalities or fancy prose – it’ll be for my eyes only.

Yours, Alex

FROM: OfficeofChiefeconomic [email protected]

TO: Office of the First Minister

Re: 2012 FORECASTS URGENT

OUT OF OFFICE REPLY All e-mails automatically forwarded to deputy chief statistician till Jan 6.

FROM: OfficeofDeputychief [email protected]

T0: Office of the First Minister

Re: 2012 FORECASTS URGENT

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FROM: [email protected]

T0: Office of the First Minister

31.12.2011

Re: 2012 FORECASTS URGENT

Dear First Minister,

Your recent e-mail to the chief economic adviser has been passed to me. It’s Hogmanay and I am the only one left in the office.

My apologies for being unable to meet your deadline. As you will know, those draconian spending cuts imposed by the London-based parties have resulted in non-replacement of staff, early retirements, and several unexpected departures. However, for future reference, you may wish to make use of our Rapid Response Telephone Hotline (Mondays to Fridays, 9am to 4.30pm not including Bank Holidays). Ask for “Ruth” or “Johann”. I’m sure they’ll be able to help.

On the economy I have to warn you that the outlook is not at all good. All the available forecasts are grim. But there are two consolations for you here. First, the forecasters were out by a mile this time last year, erring far on the side of optimism. As a result, few people now believe in any forecasts now.

And second, such is the time-lag between the current quarter and the release of GDP statistics typically some five months later that this may well work in your favour. Opponents will be unable to level the charge of “Recession under Salmond” until such a downturn is already well known and can thus be dismissed as “old news”. (The corollary, however, is that you won’t be able to proclaim an exit from recession until five months after the event, unless of course the budget for our statistical department is substantially raised and we can bring you a “flash estimate” within weeks.)

By way of reminder, it is worth recalling where we are currently with the economy and comparing this to those early 2011 predictions before we get into crystal ball gazing for 2012.

The economy here is currently growing at an annualised rate of just 1.1 per cent. This is based on the latest published official figures up to the second quarter of 2011, and compares with a growth rate of 1.5 per cent for the UK as a whole. Since then the pulse has slowed to the point where we’re wondering if there is a pulse at all. Household consumption is under the cosh while exports have taken a bashing with the slowdown in the Eurozone. So an out-turn of between 0.6 per cent to 1 per cent seems likely for 2011.

This is well below what was being forecast at the start of the year. Back then, Cambridge Econometrics was forecasting growth in Scotland of 1.25 per cent. Experian was more cheerful at 1.7 per cent. And the Ernst & Young ITEM Club was positively strung out on the happy pills with 2.3 per cent (now drastically reduced at the start of December to just 0.6 per cent).

The nearest to Planet Reality was the Fraser of Allander Institute with a forecast of 1.1 per cent (since cut to 0.4 per cent). For the record, the official Scottish Government forecast – made back in March – from Dr Andrew Goudie, then chief economic adviser, was that the economy here would grow by “close to two per cent”. The out-turn is now set to be about half that.

Being more than 50 per cent out might suggest you keep all such forecasts at a safe distance. But “don’t blame the economists” would be my advice. How were we to predict the weather effect, the Royal Wedding effect and most of all the numbskull Eurozone effect? Non economic events had a traumatic impact on European and Western economies from the summer of last year.

Having thus erred on the side of optimism for 2011 it is unlikely the crystal-gazers will get themselves caught on the sunny side again. Indeed, an air of deep foreboding now surrounds almost all forecasts for the year ahead.

They are all miserable – and this is after a critical assumption that the sovereign debt crisis in the Eurozone does not get worse.

For the record, Ernst & Young, previously so cheerful, has cut its 2012 growth forecast from 1.9 per cent to just 1.1 per cent. The Fraser of Allander Institute is pointing to growth of just 0.9 per cent (“We are predicting weaker growth than previously and weaker growth than the UK”). Experian is on 1.9 per cent but this is likely to be revised down. And every single forecast would be swept off the table should the Eurozone crisis erupt again. When you consider the long-term trend rate of growth of 2.5 per cent, this will feel like a recession even if one is officially avoided.

And given the deep unpredictability of events in Europe, I can only repeat the sage admonition of our new chief economic adviser Gary Gillespie earlier this month, “Forecasts for the Scottish economy should be viewed with some significant health warnings and can become quickly out of date, as figures are revised to reflect ever-changing developments”.

The deeper problem with GDP statistics of course is that they do not really capture the reality on the ground. E&Y has estimated the economic loss sustained in Scotland overall since the financial crisis at some £40 billion or £17,000 per household in Scotland.

The better guide to our economic health is employment and here we are unlikely to see a return to the peak pre-crisis levels until the early 2020s: truly “ a lost decade”.

The year ahead will also see further rises in insolvencies in Scotland. According to leading accountants and business advisers PKF, about 25 Scots firms a week will go bust during 2012, exceeding the total of around 1,300 likely to have gone under in 2011. “Whole swathes of Scottish businesses are being adversely affected by the continuing economic downturn”, says PKF’s corporate recovery partner Bryan Jackson. “While we are not seeing many large businesses go under we are seeing dozens of smaller businesses collapse”.

So what in summary is my advice? There’s only one thing for it, First Minister. You must remain upbeat and cheerful at all times. Keep smiling through. Keep calm and carry on. Talk up those examples of where Scots businesses are investing and expanding. And once we’ve got more staff here, we’ll be right behind you with the numbers. For the moment that’s me finished. And as I’m the last one in here I’m switching off the lights.

Happy New Year,

Bill