PLUNGING oil, central bank warnings on interest rates and a crashing stock market: such was the offstage cacophony last week as Scotland’s chief economist, Gary Gillespie, stepped up to unveil his State of the Economy Report.
“Economic growth resilient despite challenges” was the heading on his latest summation. You know something’s bound to go wrong with chancer headlines like that.
There’s a gush of good news. Scotland has had a fair run – and certainly much better than the Fraser of Allander Institute and others were predicting five years ago: we would be lucky to see any recovery at all. And the administration’s own relentless attacks on “Westminster austerity” and “ruinous spending cuts” might also have led us to despair of an upturn.
Galloping Gary’s survey churns those arid estimations into farmyard mud. Scotland’s economy, he opens, far from stagnating, has now experienced its 11th quarter of expansion, recording growth across all main sectors.
Continuous growth over the last three years demonstrates, he writes, “the resilience of Scotland’s economy and driven positive trends in the labour market. Employment reached record highs over the last year, unemployment is close to its pre-recession average rate, and there are now signs that real wages are rising.”
And on top of this are rising house prices, growing consumer confidence and low inflation which have worked “to boost household incomes and spending, which have been positive for the economy”.
A bouquet, then, on its way to George Osborne? Not a bit. It is John Swinney who takes the bow, parading his wonder horse as George seems little more than a misbehaving stable boy mucking out the byre as our economy achieved its longest continuous expansion since 2001.
First quarter growth was, says Gillespie, “broad-based, although construction stood out with very strong growth underpinned by public investment, including in infrastructure and housing… The continuing improvement in economic conditions is fostering confidence and investment – visible in rising house prices and high levels of inward investment – and these areas will drive growth throughout 2015.”
It could hardly be more upbeat. Indeed, so much has construction “stood out” you can’t help but wonder at the buoyancy of the statistics. Construction showed a 21.1 per cent surge over the year to end March, compared with a more modest 4.5 per cent gain across the UK as a whole. Credible?
Another eyebrow-raiser is the relatively sluggish performance of the service sector in Scotland. It grew by just 1.6 per cent over this period, barely half the rise recorded for the UK overall. Mystery surrounds why its performance was so lacklustre – all the more question-begging as services account for some three-quarters of Scotland’s GDP.
We are certainly going to need resilience in the Scottish economy as the “noises off” threaten to disrupt the good run we have had. Gillespie’s report points to internal and external challenges ahead: further tightening of budgets by the UK government, the impact of low oil prices on oil and gas sector profitability and investment, and subdued demand in global export markets alongside the strength of the pound.
These concerns have been mightily underscored in the past week. Shares and oil prices around the world have plunged, driven down by renewed fears over the health of the global economy. In China, further government intervention was needed to break the latest tumble on the stock market. In the US, policymakers at the Federal Reserve said the economy was not yet ready for that widely expected rise in interest rates. And across Europe stock markets fell back on worries that China’s economy may be suffering a deeper slowdown than so far admitted. In the UK confidence has been rattled and shares have tumbled to a seven-month low.
Here in Scotland there are renewed worries over the knock-on effects of the fresh plunge in the oil price across the North-east economy. The spot price for crude fell back below $47 a barrel, down by $10 in barely three weeks. This has sparked fears of more lay-offs and investment cutbacks. The slump has already cost more than 5,500 jobs.
Last week Aberdeen-based oil firm EnQuest revealed a decline in North Sea output and a slump in pre-tax profits from £76 million to £7m.
All this signals deeper concerns ahead for an SNP administration whose political fortunes have been buoyed by surging North Sea oil tax revenues. Today Scotland has to contend with a sharply different reality. The Scottish Government’s latest Oil and Gas Analytical Bulletin (OGAB) revealed big downward revisions to its previous estimates made in May 2014.
The previous edition predicted that for the financial year 2018-19, oil revenues would range between £3.2 billion and £8bn. The latest edition brings these numbers down sharply, with the range now £0.7bn to £2.8bn.
Several scenarios were calculated – an oil price of $70 a barrel and production falling between 4 and 5 per cent a year; an oil price of $70 but with production rising by 3 to 4 per cent a year; a phased 30 per cent improvement in efficiency reducing costs; and an “optimistic” scenario with the price recovering to $100.
John McLaren and Jo Armstrong of the think tank Fiscal Affairs Scotland have crunched through the numbers and arrived at a sobering conclusion. Even if higher production, improved cost efficiency or a higher price were to arise, each would add only £0.6bn, £0.3bn and £1.1bn respectively to revenues. Or, if all three uplifts were to occur, just £2.2bn more would accrue to oil and gas revenues in 2019-20.
And the potency of a price rise has been reduced due to tax changes and decommissioning costs. Last year OGAB calculated the impact of an $8 a barrel price rise would raise revenues by £1.6bn. In this year’s report a £1.7bn rise in revenues would require a $30 rise hike in the price. The game has changed.
Gillespie may well be right in his prediction of continuing growth across the onshore economy this year. But the skies beyond are darkening. The gauge of good news is flickering. And Scotland’s North Sea oil comfort blanket is markedly less comforting than it was. «