Debt-fuelled spree won’t help economy experts warn

Recovery in recent months has been based largely on a debt-fuelled consumer shopping splurge. Picture: PA
Recovery in recent months has been based largely on a debt-fuelled consumer shopping splurge. Picture: PA
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SCOTLAND’s recovery from ­recession has been built on debt-fuelled spending by families and cannot be sustained without a boom in exports and ­investment, the country’s leading independent economic body has warned.

In its quarterly analysis, the Fraser of Allander Institute at Strathclyde University said the emergence of the country’s economy from the doldrums had only come about because already indebted households had decided to start spending again.

Genuine sustainable recovery can only be guaranteed, it warned, if the country vastly increases its exports and business investment, rather than through another consumer-led boom.

Business figures last night agreed the pick up in the economy was “fragile”. Ministers’ attempts to double UK-wide exports have also faced difficulties and there have been warnings that firms are not boosting sales enough in emerging markets.

Nevertheless, the report by the Fraser of Allander Institute, sponsored by PricewaterhouseCoopers LLP, forecasts Scottish GDP growth of 1.3 per cent in 2013 – up from the June and March forecast of 0.9 per cent.The 2014 forecast is also revised up from the 1.6 per cent predicted in June to 1.8 per cent, while estimated growth for 2015, 2.1 per cent, unchanged from the June prediction.

Also on the positive side, the commentary says the country is now witnessing a “more robust recovery”, with new jobs being created, and unemployment falling.

Scotland can expect 21,200 net new jobs in 2013, rising to 27,200 in 2014 and 38,400 in 2015, most in the service sector.

However, Brian Ashcroft, emeritus professor of economics at the institute, said: “The ­renewed growth is largely ­driven by an increase in ­household spending, fuelled by borrowing even when ­household debt remains high.

“Unless net exports and investment recover soon we have doubts whether the recovery can be sustained.”

The report concludes households in Scotland are now ­borrowing and spending more than they did in the wake of the financial crash of 2008.

It adds: “But if real incomes continue to fall and asset prices – mainly housing – remain flat, it is difficult to see how such borrowing and spending can be sustained.”

The report highlights the rise in borrowing, with the growth of pawnbrokers and payday loan operations on Scottish high streets: “It appears that many people are selling assets – cameras, electronic equipment – to raise funds for current spending. This could be giving a boost to the economy. But it is hard to see how it can last, without rising real incomes and asset values.”

The report also says the economy is likely to receive a

“Commonwealth bounce” next summer, with the Glasgow Games. But it warns recovery would be hampered by UK government attempts to rein in its debt, likely to take out a further £70 billion from the economy.

Paul Brewer, senior partner at PWC, said: “Scotland is among the best-performing UK regions outside London and the south-east, and that is welcome. However, recovery based on consumer spending against a continuing background of weak real incomes is unsustainable.”

Turning to business ­investment, the report says that while Britain’s recovering banks now appear more ready to lend, firms still show a lack of ­appetite to borrow and invest.

On exports, the report says there have been “signs of improvement” in 2013 but adds performance remains “weak”. The slow recovery across Europe and in the UK will continue to hamper Scottish exports, the report says. “The robustness of the recovery in the UK as a whole, which is the largest market for Scottish goods and services, will be ­critical for the ability of Scotland’s economy to generate exports and grow,” the report says.

Business groups last night said they agreed with the assessment of a brittle recovery. Liz Cameron, chief executive of Scottish Chambers of ­Commerce, said: “The uprating of the forecast of Scottish economic growth both this year and next is extremely welcome. That said, we are in full ­agreement with the Institute’s assessment that growth remains fragile in the absence of a ­tangible pick-up in investment.”

CBI Scotland director Iain ­McMillan said: “Government at all levels can assist the strengthening recovery by keeping down costs that affect firms and by making it easier for firms to invest and export.”

Politicians last night chose to highlight the rising predicted growth. Finance secretary John Swinney said the forecast “reflects the continued quarterly growth in the Scottish economy over the past year”.

Scottish Secretary Alistair ­Carmichael added: “The growth underlines that Scotland is doing well as part of the UK.”

Consumers: British shoppers prove the world’s most optimistic

Consumer confidence in the UK is rising faster than almost anywhere else in the world, hitting its highest level for six years.

A report by polling organisation Nielson found that consumer confidence jumped eight points on the previous quarter to 87 between July and September this year.

The UK’s growth was the fourth highest of all 60 countries surveyed, according to the Global Survey of Consumer Confidence and Spending Intentions. A shift in shoppers’ habits, prompting retailers to offer discounts and cut price goods has helped boost the economy, experts said.

The number of consumers believing that the UK is in a recession dropped seven points to 74 per cent – the lowest level for five and a half years – while the proportion believing the country will be out of recession in the next year jumped to 19 per cent, its highest level in three years.

“UK consumers have become more savvy shoppers over the last three years,” said Nielsen managing director for UK & Ireland Chris Morley.

“By shopping differently, they have weathered the storm of rising household costs and falling real-term wages. Throughout this period, British consumer confidence remained stubbornly weak, but in recent months it has finally taken an upward turn.”

He added: “Looking ahead, many UK households still intend to spend carefully should economic conditions improve, so we anticipate a continuation of great offers, and that leads us to forecast an easier ride for UK consumers over the next three years.”

“Rising utility bills” was ranked as the first or second biggest concern for 31 per cent of people, the study said, making it a worry for more people in the UK than anywhere else in Europe. However, the number of Britons who feel positive about their job prospects is above the European average at 26 per cent.

Retail sector: Growth in sales and volume ‘show progress being made’

POSITIVE figures from the retail sector have cemented a strong economic recovery, politicians have claimed.

Retail sales grew in volume and value in the third quarter of the year, according to new official figures from the Scottish Government – but still lagged behind the rest of the UK.

Finance secretary John Swinney said the latest statistics were one of a number of positive figures that showed the “significant economic progress” that was being made.

The volume of sales north of the Border grew by 1.1 per cent over the period July to September, and was 2 per cent higher than the same time last year, according to the latest Retail Sales Index for Scotland.

But across the UK the volume of sales rose by 1.6 per cent over the quarter, to a level 2.7 per cent higher than 12 months ago.

“We welcome today’s Retail Sales Index statistics, these show that retail sales performance have continued to grow over the past year,” said Mr Swinney.

He added: “These figures follow on from recent GDP and labour market statistics, which show employment in Scotland is at its highest level since the summer of 2008 and a continued growth in the economy and new figures also showing a growth in the number of new businesses. These positive figures highlight the significant economic progress being made.”

There has been a raft of positive economic date in recent months.

Between April and June this year, Gross Domestic Product (GDP) rose by 0.6 per cent, in line with the figure for the UK as a whole.

Equivalent GDP for the year would be 1.8 per cent, meeting revised estimates from economic forecaster the Fraser of Allander Institute.

A spokeswoman for the Scottish Retail Consortium said: “These figures are broadly in line with our own, and suggest that cautious optimism has been building over the last quarter thanks to growing consumer confidence and signs of rosier news in the wider economy.

“Recovery remains fragile, but retailers will be hoping that momentum continues to gather as we enter the all-important pre-Christmas trading period.”

Enterprise: Boom in small business – but rates are a burden

The number of businesses in Scotland has reached the highest level for 13 years, according to new figures.

Scottish Government statistics revealed that in March this year, there were 343,105 private-sector enterprises – the greatest number since 2000. At the same time, separate figures showed an increase in cash going to small businesses in the rates relief scheme.

The Scottish Government’s Small Business Bonus Scheme paid out £154 million to 92,381 companies in 2013-14, up from the £144m paid to 89,087 firms last year. Over the past five years, the number of firms receiving help with their rates bills as a result of the initiative has increased by 44 per cent.

Liz Cameron, chief executive of the Scottish Chambers of Commerce, said while the relief scheme was “extremely welcome”, the amount of cash the Scottish Government raised from rates was increasing. She said: “The Small Business Bonus Scheme has been an extremely welcome and timely relief to many small businesses across Scotland and is easing the business rates burden by £154m this year alone. Since the scheme was introduced in 2008, it has contributed to the success of tens of thousands of businesses each year.”

But she added: “The fact remains that revenues from business rates have risen from just over £2 billion in 2010-11 to £2.4bn this year.

“Despite the excellent Small Business Bonus Scheme, many Scottish businesses are being hit hard by increases in their rates.”

Close call over Grangemouth

Professor Brian Ashcroft said that if the Grangemouth petrochemical plant had closed last week as was threatened, the economic figures would have been vastly different.

The future of the plant and adjoining oil refinery is now secure after union members accepted a raft of changes to pay and conditions to reverse the decision by owners Ineos to shut the site.

The expert said: “It would have been devastating for the Scottish economy.

“We are forecasting growth of 1.8 per cent next year. If Grangemouth in total had closed we estimate that the Scottish GDP would have fallen by 1.2 per cent, so almost the whole of the growth next year would have been blown away.”

He added: “Even the petrochemical plant [closure] would have lowered GDP by 0.7 per cent, so nearly half the growth we’ve forecast for next year.”