Infrastructure investment boosts Scottish growth as further austerity looms

It outlined forecast for GDP growth at 2.5 per cent in 2015, 2.3 per cent in 2016, and 2.3 per cent in 2017; a slight downward revision from its March 2015 forecasts.

However, threats to recovery remain, the report sponsored by PwC warned.

These include the UK Government continuing, or even tightening, planned austerity measures in the forthcoming Budget on 8 July, and the growing threat of a Greek exit from the euro with the risk of contagion to other economies including Scotland.

Brian Ashcroft, Emeritus Professor of Economics at the University of Strathclyde, said: “In his forthcoming Budget, it is crucial that the Chancellor takes action to minimise the threats to the recovery by encouraging productivity and real-wage enhancing investment. He should also consider increased incentives to exporters and, at a minimum, a slowing in the pace of his fiscal consolidation plans.”

The Institute also warns that sustainable recovery is being threatened by a combination of unbalanced growth that relies unduly on household spending that depends mainly on rising and potentially unsustainable personal debt, and the UK’s overall weak trade performance.

The latest Economic Commentary, which is published today, outlines a number of positive influences on the Scottish economy that are collectively stimulating demand for Scottish goods and services.

Infrastructure spending, with projects such as the Forth Road Bridge and M8 completion, are complemented by a steady stream of foreign direct investments, with over 80 inward investment projects coming to Scotland in 2014.

Domestic inflation remains close to zero and, combined with even modest earnings/income growth, is helping to boost real incomes. External demand remains reasonably strong, with growth in the Eurozone beginning to strengthen while US growth, which faltered earlier in the year looks set to pick up again.

Professor Ashcroft added: “We should not underestimate the threats to the recovery from rising household debt, little growth in real wages, the dark shadow of further austerity and the rising possibility of Greece leaving the euro.”

The report added that while the Scottish and UK economies continue to grow and recover from the Great Recession and, despite some recent evidence of a slowdown, there are some variances beginning to emerge.

The report explains: “The Scottish economy has now enjoyed positive growth for the last 11 quarters (since Q1 2012) while in the UK the sustained recovery period has been shorter at 8 quarters. Nevertheless, the UK recovery in output and jobs is still stronger than in Scotland. UK GDP, ex oil & gas, is 5.1 per cent above the pre-recession peak compared to only 2.3 per cent in Scotland, while jobs in the UK are 4.6 per cent higher than the peak compared to 2.6 per cent in Scotland. The service sector has been a significant driver of growth in the UK, but made no contribution in Scotland during Q4 2014. And in contrast, the Scottish construction sector was a principal driver of growth while in the UK, it acted as a drag.”

The Institute speculates that the stronger UK recovery may, in part, be a reflection of a stronger recovery of R&D activity in rest of UK compared to Scotland.

Paul Brewer, Government and Public Sector partner, PwC in Scotland, said: “There is some real evidence of recovery across Scotland, with infrastructure and construction in particular, making a real contribution to growth, reflecting both growing business confidence and the impact of major projects like the Forth Crossing and M8 completion.

“While we hope that these trends continue, the service sector has not demonstrated the levels of growth experienced in other UK regions and that remains a cause for concern.

“The impending referendum on UK membership of the EU remains on the horizon and, while it has not apparently made any significant impact on investment and foreign direct investment, there is little doubt that, as 2016 and the referendum loom, so-called ‘Brexit’ will become a concern, particularly for the financial services sector.”