Scotland’s growth slows further amid growing uncertainties

The Institute argues that the main positive influences on Scotland’s economic growth are: domestic demand is still growing; domestic inflation is close to zero; nominal earnings/income growth is picking up slowly and so boosting real income; interest rates remain low and household demand is boosted by some pick up in wages and earnings; and external demand for goods and services is being boosted by the continued resilience of the US economy and a gradual pick-up in growth in the Eurozone as the risks of deflation appear to recede.

However, researchers said there are also significant threats to Scotland’s economic growth. The low price of oil is producing a drag on Scottish growth, with the negative supply effect outweighing a positive demand effect – and this is being sustained by the longer than expected delay in the recovery of oil prices which is dampening overall investment expenditure.

Other factors identified include:

•unbalanced growth with household spending the key driver fuelled largely by rising household debt which appears unsustainable.

•net trade (exports minus imports) continues to be strongly negative, exacerbated by slowdown in China and a slowing of the growth of world trade.

•fiscal austerity continues in the UK, and may be strengthened further since the Chancellor has signalled that he may need to tighten the fiscal stance in his Budget as tax revenues remain weak with growth of GDP now projected to be lower. According to the Institute this would be a mistake serving to worsen the slowdown in growth and tax revenues.

•finally, the referendum on the UK’s membership of the EU announced for June 23 2016 increases uncertainty significantly in the short term, which is likely to have a negative effect on investment, as plans are postponed until the outcome is clearer.

Brian Ashcroft, Emeritus Professor of Economics at the University of Strathclyde, said: “With growth slowing further across the UK and even more so in Scotland, now is not the time for the Chancellor to adopt more austerity measures which will slow growth further and only worsen the flow of tax revenues to the Exchequer.”

The Institute’s analysis of the implications of Brexit for the Scottish economy leads to the conclusion that it is difficult to imagine that it would help improve Scotland’s competitive position with respect to our trade with the EU.

In recent years, the decline in electronics production and the erosion of Scotland’s manufacturing base has meant that Scotland has struggled to maintain its penetration of EU markets even on the favourable trading terms obtained through membership.

It is difficult to see how any post BREXIT trading relationship with the EU would be better than current arrangements. So, not only would actual and potential Scottish exporters have to overcome their weaker competitive position due to lower labour and total factor productivity they would face the additional hurdle of less favourable trading arrangements. Moreover, Brexit might worsen Scottish productivity growth particularly via the negative effects on trade, inward investment and financial integration.

Prof Ashcroft said: “Scottish voters in the referendum on June 23rd should not lightly dismiss this warning about the consequences of Brexit for productivity growth in view of the already weak performance of Scottish productivity.”

Paul Brewer, Government and Public Sector partner, PwC in Scotland, said: “The Scottish economy faces a number of domestic and external challenges. Global markets remain difficult territory for Scottish exporters while domestic consumption in being fuelled by worrying levels of household debt. Nonetheless, projected growth is relatively close to overall UK forecasts and remains ahead of other UK regions, with Scottish exporters supported by US demand and a modest upswing in EU markets.

“The potential for the forthcoming Budget to exert further fiscal tightening, oil price uncertainty and the uncertainty surrounding the potential outcome of the EU referendum together create a difficult environment for business and investor confidence.

“With the effects of the lower for longer oil price backdrop now rippling through other sectors, another smart strategy the Chancellor could employ to sustain the flow of oil investments in this mature North Sea basin and protect long-term total tax revenues would be to reduce the tax rates on oil companies. Cutting the headline rate, currently ranging from 50 per cent to 67.5 per cent, and the infrastructure tax burden for example could provide a much needed cushion – and, crucially, provide a stimulus for investment and its tax paying employees.”

Mr Brewer added: “Despite those headline concerns, the report projects continued modest growth in output and employment and a steady decline in unemployment. And we’re continuing to see the economic fruits of the Scottish Government’s strong focus on major infrastructure projects and construction output figures continuing to outperform the UK trend. But lead times are long and generating a sustainable pipeline of new projects over the next few years will be vital if we are to maintain this momentum.”