Bill Jamieson: Worries mount over the recovery

The pound fell to a ten-month low against the dollar on Friday. Picture: Getty

So where are we at? And where are we going?

Markets tumbled again last week on worries over global growth, Eurozone stagnation and persistent concerns over deficit and debt levels. Stock market volatility – a fall of almost 8 per cent in barely a fortnight – caused Edinburgh housebuilder and property firm Miller Group to abandon its plans to float its housing business.

On Friday the pound fell to a ten-month low against the dollar on the closely watched Markit services purchasing managers’ index (PMI), sagging to a three-month low of 58.7 in September from August’s 60.5. It suggests the recovery may be losing its legs. Earlier last week, figures from the Markit PMI for manufacturing showed a fall to 51.6 from 52.2 in August, with firms reporting growth in new orders “near stagnation”.

However, set against these was the latest PMI survey for construction, showing further robust expansion. It found construction activity at an eight-month high last month and at its second-highest level since August 2007.

And remember that UK real GDP growth has markedly outperformed consensus this year and is likely to continue to do so in 2015. Investment bank Citigroup is still looking for GDP growth of 3.3 per cent for this year and 3.5 per cent for 2015. Growth, it says, is likely to be led by domestic spending rather than exports.

While nervousness has set in, the silver lining to the PMI clouds on services and manufacturing is that the Bank of England may sit out a pending rise in interest rates and defer a move into the new year.

Here at home, after a ferocious referendum battle focused on government spending plans, welfare benefits, health spending and income inequality, surely it is now time for Holyrood policymakers to attend to the productive sector of the economy and help to lift private sector investment and expansion?

But political attention is still fixated on “more powers”, with every sign that constitutional politics will continue to dominate policy attention both at Holyrood and Westminster. How telling that when Prime Minister David Cameron talked last week about tax cuts both at the lower and middle income levels, the Conservatives moved above Labour in opinion polls for the first time since 2012.

The “more powers” that really matter for tens of millions of people are those that give them more power over their own income to spend and save as they wish, rather than more powers for politically determined public spending.

That said, a big credibility gap has opened up between the commitment of the two major parties to deficit reduction and their plans for more spending (Labour) or tax cuts (Conservatives). As it is, deficit constraints and the ever rising cost of annual debt interest – £52 billion this financial year, rising to £75bn in 2018-19 – will mean a formidable squeeze on public spending in the years ahead.

The economic upturn has not brought the uplift in government tax revenues that traditional models led the Treasury to expect. Much of the uplift in employment has been at the low-pay end where the tax take is low or non-existent.

The continuing sluggishness in income growth is a reality with which business has to deal.

We’ve seen how pressures on household income have had disruptive consequences for Britain’s major food retailers as discounters such as Aldi and Lidl have pulled customers away. And the growing switch to internet shopping has drained revenue from many traditional high street outlets.

There are two principal concerns for Scots business in all of this: what the Scottish Government will do with its extra tax-raising powers; and the impact of the spending squeeze on the budget, and the allocation to capital spending in particular.

The Scottish Government’s draft budget for 2015-16 will be published soon after Nicola Sturgeon’s selection as new SNP leader (and thereafter First Minister) is formally approved. Ahead of the new financial powers of the 2012 Scotland Act taking effect from April next year, the draft budget will include proposals for setting the rates and bands for the devolved taxes, including for the Land and Buildings Transactions Tax (LBTT). The act provides for a “proportional progressive tax structure” for both residential and non-residential property transactions. This includes a nil rate band and at least two other bands. Written evidence has been invited on LBTT and on its potential impact on the Scottish property market and the wider economy. The deadline for these is 24 October.

As important for many Scots firms, particularly in the construction sector, will be the budget projections for capital spending. The Scottish Government has sought to supplement its capital budget for 2014-15 with Non-Profit Distributing (NPD) funding of £809 million. This includes rail enhancements (£449m), capital receipts from the sale of assets (£80m), and transferring more resource spending to capital (£165m), taking the total planned spend on infrastructure in 2014-15 to more than £4bn.

NPD-financed projects managed by the highly regarded Scottish Futures Trust include the M8, M73 and M74 motorway improvements, the Aberdeen Western Peripheral Route as well as school, college and health projects. As important as new projects is the need to use existing public assets more productively, such as offices where over-provision of space and falls in numbers employed compel the sell-off or letting of underused capacity.

Infrastructure spending helps to boost recovery and employment, so finance secretary John Swinney has to be mindful that suppressing capital spend for vote-boosting current spend perks and giveaways comes at a price. Business will be watching closely given their concerns that the recovery momentum may be slowing. The skies above may still be fair. But they are far from cloudless. «