Comment: Economists’ clouds have a silver lining

The oil price fall has fuelled uncertainty. Picture: Getty

It is a fundamental requirement of economists to be sceptical. Without cool and objective appraisal of where we are and the direction of travel, there would truly be little but political froth and spin.

In the Fraser of Allander (FoA) quarterly appraisals, these two elements collide. The latest edition is no exception. In its constant searching and pressing on the weak spots of our performance, it provides a bracing counterfactual to the assertions of broad-based, transformative recovery.

For years – until the government took its foot off the austerity brake in 2012 – we had the slowest recovery from the global recession of any advanced country, with the exception of Italy and Greece.

As for those “record numbers in work” headlines, FoA insists that the labour market recovery has been biased in favour of part-time employment, self-employment and temporary employment. Full-time employment still remains more than 4 per cent below its pre-recession peak and the total numbers of hours worked is still lower in Scotland than before the recession.

Nor is the quality of recovery up to much. “The composition of Scottish and UK growth”, says FoA, “also continues to be unbalanced with household spending driving growth, and fixed investment making a variable contribution.

“There is little evidence of the attainment of the UK Government’s objective of a rebalancing away from domestic spending on consumption. Consumption or household spending continues to be the principal driver of UK growth. And, as we have stressed in recent commentaries, household spending is being fuelled by rising debt, which is almost certainly unsustainable.”

Oh, dear. Our performance really isn’t up to much. After six years the scars of the financial crisis and recession are still all too visible. And formidable problems on “fiscal consolidation” (debt and deficit reduction) lie ahead.

All true. But not all the truth.

Almost submerged from view in this forensic probing of our failures and shortcomings are grudging admissions of overstatement of our ills. Time and again the FoA forecasts have underestimated the strength of economic recovery. Time and again it has had to raise its forecasts. And here, too, the latest edition is no exception. It now predicts that the Scottish economy will grow by 2.6 per cent in 2015 and 2.4 per cent in 2016 – an upward revision to its November 2014 forecasts.

It is worth quoting this recantation in full. “These”, it says, “reflect our view of a strengthening of the recovery. We have also raised our forecasts for employee job creation compared to our November forecasts.

“On the central forecast, we are now forecasting that net jobs will increase by 53,850 in 2014, 51,350 in 2015 and 57,600 in 2016. Our unemployment forecasts have been revised down further again from November, reflecting higher economic activity. Our projection for unemployment on the ILO measure at the end of 2015 is 136,600 (5.0 per cent), falling further to 125,250 (4.6 per cent) by the end of 2016.”

What does all this suggest? The recovery – this weak, flawed, imperfect specimen – is set to stagger on, reducing us to the strongest economic growth since the global financial crisis and the greatest economic shock since the 1930s. Our labour market is also expected to continue to improve. Scottish employment is at a record high, more women are in work than ever before, wages are rising and inflation is at a record low.

Woe and thrice woe.

There has never been such a thing as a flawless, untroubled recovery. Circumstances vary in each case. The FoA argues that the recovery has taken longer than from the 1930s Depression or any of the three other recessions experienced since the 1970s – slowed considerably, it says, by the austerity programme.

But we do not know for sure what the recovery pace would have been or the state of financial and business confidence in the absence of attempts to slow the rise in our deficit and debt. IMF strictures would have rained down while many would have questioned the sustainability of such a course.

As it is, debt interest is blowing a £40 billion-plus hole in the public finances each year, constraining the very infrastructure investment that the FoA has been championing.

A big uncertainty this time around is the plunge in the oil price. “Overall”, says the FoA, “we cannot draw a definitive conclusion on the impact on the wider Scottish economy… What we can say is that the growth of Scottish onshore GDP is unlikely to be seriously harmed in 2015 and in 2016. Indeed, growth might actually benefit if the income effects of a lower oil price on increased household spending, investment and net exports are large.”

And other dynamics are at work, such as the growth in business start-ups and the rise in numbers of self-employed. We do not know much about the broader, macro-economic effects of these. Employment numbers may certainly have risen. But average pay across the self-employed sector tends to be significantly lower on average than in the salaried world, while the marked growth in the number of “retirees” (sic) in part-time self-employment may be a factor in the holding down average pay levels.

What a fruitful area of research this would be for the FoA to undertake – a project surely that the University of Strathclyde or the Scottish Government would support.

Meanwhile, there are three other commendable articles in the latest FoA quarterly – a tour d’horizon by Alf Young of the Scottish economy over the 40 years of the FoA’s existence; an informed analysis of Scotland’s financial sector and its prospects by Jeremy Peat, visiting professor at the University of Strathclyde; and a stimulating piece on behavioural economics and its policy implications by Alex Dickson and Marco Fongoni of the University of Strathclyde.

I will take care to read this under cover in bed. Behavioural economics can start a fight in an empty room.

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