More than three weeks since the referendum vote to leave the EU and dense confusion continues to cloud the outlook. Business confidence surveys in the immediate wake aftermath indicate a body blow. Economic data point to a marked slowdown ahead.
The vote, triggering at bewildering speed a political convulsion, a new Prime Minister, a collapse then a rally in the stock market, and a collapse then a partial rally in the pound, is proving the most convulsive event of the past 50 years and one with profound implications for our economy and our prospects.
Much of recent commentary has proceeded as if the 23 June vote is the sole or main cause of the difficulties we face. But we must guard against muddling cause and catalyst. Many of our economic problems are deep-seated and have been a source of concern for years. The vote has also highlighted a worrying international context – one that was deteriorating long before Brexit and which cannot be regarded as having been caused by it.
For example, last week brought a survey from the venerable Fraser of Allander Institute that most Scottish firms believe Brexit to be bad for their prospects and the economy.
It found more than 60 per cent of Scottish firms believe Brexit would have a “negative impact” on them – though there was little evidence of companies cancelling investment or recruitment outright.
Earlier in the week it had called on Scotland’s political parties to carry out an urgent review of economic policies in the wake of the EU vote. The report, by Graeme Roy, former head of policy for the First Minister, and Andrew Goudie, former chief economic adviser to the Scottish Government, said it was “impossible to carry on as normal” after Brexit.
But how much has been “caused” by Brexit and how much by other factors? Context here is all-important. Back in February, a sombre G20 meeting moaned that policies in the wake of the global financial crisis had been less effective than expected.
In April, the International Monetary Fund once again lowered its forecasts for the world economy, to growth of 3.2 per cent this year and 3.5 per cent next, against previous estimates of 3.4 per cent and 3.6 per cent respectively.
And in June – again before the referendum vote – the World Bank slashed its 2016 global growth forecast to 2.4 per cent from the 2.9 per cent estimated in January due to stubbornly low commodity prices, sluggish demand in advanced economies, weak trade and diminishing capital flows. Now, with the Brexit vote, a simpler and more local explanation has come to hand.
But do we really believe that, without Brexit, this wider economic and financial outlook would have been significantly brighter? “There are too many weaknesses in the world’s politico-economic structure to allow much optimism”, writes the economist Stephen Lewis. It is structural weakness rather than any specific event, be it Brexit, a Federal Reserve rate hike or a shift in China’s foreign exchange policy, which is the cause of the malaise. The events are at most merely triggers.”
As for Scotland, the latest reductions in growth forecasts follow more than a year of such downgrades. Fraser of Allander was already taking the red pencil to its forecasts last year. And the prediction from Inverness-based Mackay Consultants for growth this year of just 1.6 per cent is the latest in a series of such reductions and below the 1.8 per cent average for the UK as a whole.
“The ongoing problems in the North Sea oil and gas industry,” says Tony Mackay, “are undoubtedly the main reason for the difference.” In the past month Shell has announced 475 job losses in the Aberdeen area, while Subsea 7 has announced 430 job losses, again mainly in Aberdeen. BP is cancelling £500 million investment plans in Shetland oil terminal.
This is by no means to deny the deep uncertainty that Brexit has brought, or the challenges Scotland’s exporters face. But hopefully what it also will have brought is a greater sense of urgency to improve business investment and growth. In calling for an economic policy review, the Fraser of Allander paper suggests that exports, promotion and incentives for inward investment need to form a key part. It also suggests bringing forward the creation of overseas trade and investment hubs, as well as planned cuts to Air Passenger Duty.
And Neil Amner, economic policy chief at the Scottish Chambers of Commerce ,has called on government “to reconsider policies which have sought to impose greater burdens on business” and use their “levers of power” to boost growth, with measures such as a cut in business rates, an accelerated reduction in Air Passenger Duty and shelving the Apprenticeship Levy.
Holyrood should be alive to opportunities in the period ahead, particularly for Scottish exporters whose prospects have been boosted by the fall in the pound. Scottish exports to the EU have stagnated at around £11 billion between 2012 and 2014 while exports to the rest of the world have doubled over this period.
In this context the global slowdown should act as a spur to all countries to remove barriers to trade and to conclude trade agreements with the UK.
And opportunities to build Asia Pacific trade abound. As Asia Scotland Institute chairman Roddy Gow points out, in the five years leading up to 2014, Asian economies expanded at an average of 5.2 per cent. With a middle class set to reach 1.7 billion by 2020, huge opportunities exist for Scotland’s professionals to contribute to and benefit from the emergence of Asia.
Here the Brexit vote could prove a catalyst and a positive game-changer, particularly for e-commerce. Back in 2012, a landmark survey by Scottish Enterprise found that Scotland remains way behind other parts of the UK in its capacity to exploit the benefits of this trade revolution. “Things”, Gow writes in an article for The Scotsman this week, “have barely improved since then”.
How much more constructive it would be if the Scottish Government spent less time in constitutional posturing and instead concentrated on the job in hand of helping Scotland’s businesses rise to the challenges ahead.