Bill Jamieson: Scotland escaped recession, but can we trust figures?

GDP figures are a welcome boost but we must not read too much into them, writes Bill Jamieson.

Nicola Sturgeon inspects new offices in Glasgow. Picture: PA

It has rebounded strongly in the first quarter, with figures showing gross domestic product (GDP) grew by 0.8 per cent in the three months to March.

What a marked contrast from the previous quarter’s 0.2 per cent decline. Good news to be welcomed – and all the more so after the dark forebodings of forecasters that we were trembling on the brink of recession – two consecutive quarters of falling output. Scotland’s performance has also outstripped the UK as a whole, which saw growth of just 0.2 per cent in those three months.

Now, amid the celebrations and the flying champagne corks, I may be missing something. For there is a puzzle.

How is it that we have gone from Purgatory to Heaven in so short a period – and amid all those warnings of an economy condemned to a continuing North Sea oil and Brexit-induced downturn?

What India rubber fluids have we mysteriously injected to pull off such a bounce? Older readers may recall the children’s Magic Roundabout TV programme in which Zebedee, a character perched on springs, bounded across our screens to our enchantment and delight. Scotland’s economy, it seems, now shares this magical statistical propulsion.

Star performer has been the production sector, up 3.1 per cent, while the services sector, a weak area in recent quarters, expanded by 0.3 per cent. However, construction contracted by 0.7 per cent. Overall, Scotland’s economy has grown on an annual basis by 0.7 per cent – well above the 0.4 per cent figure cited in April.

The latest performance has taken many forecasters by surprise. Only last week the independent Fraser of Allander Institute warned that Scotland seemed to be “stuck in a weak cycle of growth” and that it was “in the balance” whether the latest figures would show any improvement.

The EY Scottish Item Club also warned the economy was showing signs of slowing faster than the rest of the UK as a result of fading consumer spending and firms remaining reluctant to invest.

Even the Scottish Government has previously argued that the impact of the Brexit vote was contributing to lower growth in Scotland. And First Minister Nicola Sturgeon declared last week that Brexit was the greatest single threat to Scotland’s economic performance.

However, the latest figures cannot but add to the debate about the accuracy of Scotland’s economic statistics. Might the 0.2 per cent downturn in the final quarter of last year have been over-stated, as Inverness economist Tony Mackay has argued? How confident can we be about the robustness of figures showing such a marked swing in our fortunes over such a short period?

That said, it has not been all gloom and doom. Recent labour market figures show unemployment in Scotland down to 4.4 per cent – below the UK average – while the proportion of working-age adults in employment is close to a record peak of 74 per cent. Many regard labour market numbers to be a better indicator of Scotland’s economic strength than GDP statistics.

The latest EY Scotland Attractiveness Survey showed that last year Scotland secured 122 foreign direct investment (FDI) projects – the most in a decade – and the highest number of research and development projects of all UK regions. Indeed, in each year since 2012 Scotland has secured more FDI projects than any other part of the UK except for London.

And Scotland’s private sector remains broadly optimistic. Last month the Scottish Government’s chief economist, Gary Gillespie, cited indicators on investment expectations which have picked up for the second half of 2017 “as more firms expect to invest more in staff training and increase capital investment”.

And only last week a Royal Bank of Scotland survey found Scottish firms were confident of expansion over the remainder of this year, despite reporting “modest” growth in the three months to June. Its business monitor suggested the weak pound had offered some comfort to exporters and tourism sector.

However, all this needs to be put in context. One quarter’s better-than-expected GDP numbers does not mean we have miraculously broken free of the deep structural problems facing the economy. Independent economist John Maclaren reminds us that, over the past two years, Scottish growth of 1.2 per cent remains well below the 3.5 per cent seen for the UK.

Scottish manufacturing output grew more than 5 per cent in the latest quarter but is still down by 6 per cent over the past two years. The recent recovery was driven by the chemicals (including refined petroleum) and metals sectors. Retail is in a miserable state while prospects for 2017 remain poor “and another year of below 1 per cent growth”, Maclaren warns, “is a real possibility”. For the record, FoA forecasts growth of 1.2 per cent this year, marginally improving to 1.4 per cent next.

And the latest signals from Purchasing Managers Index surveys across the UK as a whole are far from encouraging, confirming concerns of a slowdown under way.

As for Scotland, there is every likelihood that growth here will remain below the long-run average of 2 per cent for the foreseeable future. A debate in Glasgow last Friday hosted by the Scottish Council for Development and Industry, featuring a presentation by Professor Graeme Roy of the Fraser of Allander Institute, attracted leading public figure and opinion formers. The continued weakness in the oil price and Brexit uncertainties were contributors to our malaise but the bigger challenges lay underneath – and have persisted for years. Suggestions for lifting Scotland out of this long-term under-performance rut ranged from the need to lift productivity through a recasting of skills training to greater incentives to encourage entrepreneurs to retain and grow their businesses in Scotland – and (of course) a national infrastructure strategy.

All sensible, if familiar proposals, but clearly something more radical and far reaching is needed. Simply ensuring that the burden of taxes in Scotland is no higher than the rest of the UK as proposed by Sir Iain Macmillan’s Independent Tax Commission almost two years ago would be a useful first step. Even better would be a more competitive and lower tax regime to attract business and enterprise.

It is tempting to be fatalistic about all of this and remind ourselves that lofty studies of our underperformance relative to the rest of the UK were being written more than 80 years ago. But it is surely as mistaken to believe we are permanently condemned to a low growth economy as to seize on one quarter’s better than feared figure as a miraculous and permanent leap from entrapment.

We should take advantage of the new mood in Scotland to focus much more on the economy. But be in no illusion that underlying and sustained improvement is going to take a monumental effort of political will.