WE’RE still on course for a log-jammed parliament – yet across the UK the mood appears altogether sanguine, for now.
In Scotland, however, I detect a greater hesitancy as to what lies ahead. Confirmation in the latest Bank of Scotland economic report of a slowdown in the first two months of the year suggests that activity and confidence is brittle.
The Scottish economy has closely followed that of the UK. That may start to change
The impact of the oil plunge on the onshore North Sea sector continues to be of concern, while last week’s annual conference of the Scottish Property Federation in Edinburgh saw some storm cones being raised. The sector is apprehensive about the outlook for both business and household taxes if, as seems likely, the Scottish Government goes down the route of tax increases rather than spending cuts.
But for the moment the bigger picture remains encouraging. Revised figures for UK Gross Domestic Product due out on Tuesday for the fourth quarter of 2015 are expected to confirm growth of 0.5 per cent quarter-on-quarter (2.7 per cent year-on-year) and that the economy may have begun to regain momentum in the opening weeks of March after a faltering start to the year.
Consumer spending (up 0.5 per cent QoQ) was solid while exports encouragingly jumped 4.5 per cent. However, total investment was down, reflecting falling investment in the oil and gas extraction sector amid sharply lower oil prices. Investment may also have been hit by increasing uncertainty ahead of the May election.
Meanwhile, latest figures on retail sales suggest a pick-up is under way. The ONS reports that retail sales volumes rose 0.7 per cent month-on-month in February after a miserly 0.1 per cent gain in January. This leaves volumes in the past three months up by 2 per cent quarter-on-quarter, with volume growth in the last few months alone at the highest since 2004.
These figures, together with other buoyant consumer confidence trends suggest that the sharp upturn in real income growth, driven by higher wages and falling prices is feeding through to a marked pickup in consumer spending.
So much for fears that a period of price deflation in the UK might induce Japan-style deferral of household spending. Citi UK economist Michael Saunders says: “The idea that falling prices might lead consumers to deter spending in anticipation of even lower prices ahead is, for the UK at least, something of an economists’ myth…”
As for the growth outlook across the UK, Global Insight economist Howard Archer believes the economy may have regained a little momentum early on in 2015. He expects GDP growth to have improved modestly to 0.6 per cent QoQ in the first three months of the year, and to expand by 2.7 per cent over the year as a whole, against 2.6 per cent previously.
Purchasing Managers surveys show overall services, manufacturing and construction output growth improved in February/January from a 19-month low in December. The latest data has been mixed, says Archer, with industrial production (marginally) and construction output (markedly) dipping in January but trade data favourable. And the fundamentals look particularly promising for consumer spending, likely to grow by around 3 per cent this year.
Until now the fluctuations in the Scottish economy have closely followed those for the UK as a whole. But this may start to change. The new spring in the step around Manchester with the northern powerhouse project and the boost for the Midlands last week with two major inward investment boosts for car manufacturing and the relocation of HSBC’s HQ to Birmingham could see accelerated growth momentum.
Across Scotland, the mood is more cautious. We have not recently enjoyed inward investment coups of this magnitude. And these “wins” for the Midlands are a sharp reminder of the need for Scotland to remain competitive in a world where capital can move quickly to other locations.
This reminder is particularly acute given the growing uncertainty over the potential changes in personal tax rates over the next two years. It was a major theme of the address by Bill Hughes, president of the British Property Federation and head of real assets at Legal & General Investment Management when he spoke at the Scottish Property Federation annual conference last week.
Scotland, he warned, must guard against anything that might impair its competitiveness and encourage potential inward investors to look elsewhere. This is growing concern to developers and local authorities looking for institutional funding for major property investment and housing development.
As matters stand, business rates are set to rise from this week, prompting a call from the Scottish Retail Consortium for a reform of the rates system.
The uplift has been forecast by the Scottish Government to be worth an additional £150 million in tax revenues, bringing the total business rates take in Scotland to £2.8 billion.
Since 2009, business rates revenues derived from retail have increased by over 30 per cent while there have been around 1,800 fewer shops. SRC director David Lonsdale says: “The current system of business rates is not fit for purpose and acts as a drag on Scottish economic growth. As this recent tax hike demonstrates, it fails to flex with economic circumstances and only ever rises. This has manifestly been to the disadvantage of businesses and town centres right across Scotland.”
Liz Cameron, chief executive of Scottish Chambers of Commerce, also sounded a warning over the imminent business rates hike. “The fact that inflation now sits at zero per cent,” she said, “reveals just how out of step business rates increases have become. Next week will see bills rise by 2 per cent, far in excess of the current rate of inflation. Indeed, since the last revaluation in 2010, business rates revenues in Scotland are projected to have increased by £731m by 2015-2016, which represents some £470m over and above the rate of inflation.”
Whether these points will be given much attention in the four raucous weeks of a general election campaign is doubtful. But let there be no doubt: amber lights are flashing through the night and fog of the political war. «
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