Bill Jamieson: Gloomy forecast is just the beginning

How has it come to this? Scotland's economy teetering on the brink of recession '“ but record numbers in work; deep uncertainty over the outlook '“ but recent business surveys pointing to an upturn; an economy that's been slowing for two years '“ but little discussion at Holyrood about why this has unfolded and what might now be done.
The fall in the pound has made food and drink, including whisky, more competitive. Picture Ian RutherfordThe fall in the pound has made food and drink, including whisky, more competitive. Picture Ian Rutherford
The fall in the pound has made food and drink, including whisky, more competitive. Picture Ian Rutherford

In a previous era the marked underperformance of Scotland’s economy relative to the rest of the UK – even stripping out London from the comparison – would have had the SNP in high dudgeon mode. Instead, a muffled silence or omerta has seemed to prevail on a growth rate that is barely half that south of the Border.

Welcome to the teetering state we’re in – and a set of concerns that, astonishingly, barely featured in the election campaign.

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The latest Fraser of Allander Economic Commentary makes for grim but compelling reading for anyone concerned about Scotland’s well-being. Our Gross Domestic Product grew by just 0.4 per cent last year, and in the final three months of 2016 contracted by 0.2 per cent. Scottish GDP figures for the first quarter of 2017 due this week will confirm whether or not the Scottish economy has formally re-entered recession – two successive quarters of falling output.

“A close-run thing” is the FoA warning. “Of increasing concern”, it writes, “is the fact that the slowdown in Scotland – lasting for around two years now – appears to have spread across a wider set of industrial sectors than was previously the case.

“In the final three months of 2016, activity in the manufacturing and construction sectors fell, whilst services did not grow at all.” With inflation likely to rise to above three per cent in the coming months, says the FoA, “the outlook for household finances looks grim. Families have been trying their best to support their spending by running down their savings and expanding their credit. This cannot continue for much longer.”

Arguably the most important feature of this analysis is that the slowdown has now been under way for two years and that it brushes aside the two most common explanations advanced for this worrying state – the slump in the oil price and the uncertainties over Brexit.

“Scotland’s recent economic woes,” it writes, “can no longer be explained just by the downturn in the North Sea or indeed by Brexit” – a point made repeatedly here in recent months. “Instead, Scotland’s economy seems to be stuck in a cycle of weak growth, declining confidence and poor investment and net export figures”.

And this critically matters because Holyrood’s budget is now much more dependent upon the relative performance of Scottish tax revenues. “Getting the economy moving again,” declares the FoA, “must be a priority for everyone with a stake in Scotland’s long-term prosperity.”

This clears the way for the most compelling message of all in this assessment: that we have deep, long-term structural problems that cannot be tackled by short-term fixes, initiatives, task forces and the like. Serious thinking now has to be done on how Scotland can be lifted out of this rut and look to a future that offers little better than a moderation in the rate of long-term economic decline.

Is it that serious? Yes, it is, even allowing for the caveats in which such forecasts must be couched. First, the accuracy of official economic data on Scotland’s GDP has been challenged: Inverness economist Tony Mackay has argued that its analysis may be overstating the slowdown.

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Remember also that Scotland’s unemployment rate is at record low levels of four per cent, equalling the previous all-time low, and is also at its lowest rate since the recession – and indeed, much lower than Fraser of Allander’s post-Brexit forecast of seven per cent for this year.

Second, the FoA itself forecasts that Scotland’s economy will pick up this year, although its central forecasts for growth of 1.2 per cent in 2017, 1.3 per cent in 2018 and 1.4 per cent in 2019 are below trend with Scotland likely to continue to lag behind the UK as a whole.

Third, some sectors are set to do well – tourism and food and drink particularly, due to the fall in the pound, which has made the UK more competitive. There is also an evident, if modest upturn in the global economy which, if sustained, could further help exports and investment. Further, as I highlighted here last week, the CBI’s latest Industrial Trends Survey shows that both strengthened to multi-decade highs in June.

Its survey of 464 manufacturers found that total order books climbed to the highest level since August 1988, underpinned by a broad-based improvement in 13 of the 17 sub-sectors, led by the food, drink and tobacco and chemicals sectors. Export orders also improved to a 22-year high, hitting similar peaks to those seen in 2011 and 2013.

And finally, the slowdown in the consumer sector is not a specifically Scottish problem but is UK-wide, reflecting the fall in household real spending power as inflation runs well ahead of wage growth. That in turn would require a UK government response – lifting the one per cent cap on public sector pay growth, a temporary cut in VAT or an overall tax cut. But tax rises, not tax cuts now look more likely.

What a challenge is now faced by the Scottish government and policy agencies as to what can reasonably be done. What are the strengths, weaknesses, opportunities and threats in the present situation? What is it that our enterprise agencies and Business Gateway network can do that is different to or better than current practice? What can be done to lift our business birth rate nearer to the UK level? Are our skills agencies working as effectively as they could, and if not, how might they be improved?

And not least of all, how can government economic data and analysis be improved and made more timely? Outstanding though it is, the report of the FoA’s director Graeme Roy is not the end of the matter, but marks only the beginning of a deeper and more far-reaching search for long term policy responses.