Scottish growth slows as recession looms, warns Fraser of Allander Institute

The University of Strathclyde’s Fraser of Allander Institute has revised down its growth forecast for 2016 to 1.4 per cent from the 1.9 per cent it had projected in March.

It has also reduced its forecast for 2017 from 2.2 per cent to 1.9 per cent.

Growth in the Scottish economy has weakened over the past three months since the Institute last reported in March and it said that after GDP data revisions it is now clear that the Scottish economy came perilously close to a recession in 2015 and despite the slight upturn in the fourth quarter of last year, such a scenario may still be only months away.

The institute said Scotland is now relying solely on the service sector for growth as the contribution of Construction, driven by infrastructure spending, has now peaked, albeit at a high level of activity.

Slight negative growth in the production sector meant that the recession in the sector continued with negative growth having occurred in three successive quarters. Within production, manufacturing technically emerged from recession in the fourth quarter but manufacturing growth can only be described as weak.

Moreover, even though the service sector registered growth of 0.3 per cent in the final quarter of last year, UK services grew three times faster and performance in all principal private subsectors in Scotland is appreciably weaker than their UK counterparts.

Financial services are especially weak and the weakness of business services growth has been exacerbated by the effects of the fall in the price of oil.

Conditions in the Scottish labour market have deteriorated significantly as the job shedding associated with the consequences of the oil price fall and deteriorating export performance begin to bite. In the quarter to March 2016 the numbers in work fell by 53,000 (-2.0 per cent).

The last time there was a fall in jobs of this scale was back in early 2010. Unemployment rose by 8,000 (+4.8 per cent) to 169,000 with the rate rising to 6.2 per cent, compared to 5.1 per cent in the UK, a gap that is now the largest since mid-2004.

As a result of this downturn in the labour market, by the end of the first three months of this year the gap between Scotland’s and the UK’s employment performance had widened considerably with Scottish jobs as reported in the LFS household surveys 0.9 per cent above their pre-recession peak, compared to UK jobs which were 6.3 per cent above peak.

Brian Ashcroft, Emeritus Professor of Economics at the University of Strathclyde, said: “The Scottish economy came within a hair’s breadth of recession last year and with little improvement recently may fail to avoid a recession in the coming months.”

On BREXIT, there is a high probability that output and growth in the Scottish economy will be damaged if the United Kingdom votes to leave the EU. First, the likelihood would be that trading arrangements would be less favourable than in the EU. Not only would actual and potential Scottish exporters have to overcome a potentially weaker competitive position due to lower labour and total factor productivity, they may also have to face the additional hurdle of less favourable trading arrangements. Secondly, uncertainty attaching to a Brexit and the terms of any subsequent arrangements might worsen Scottish productivity growth through the negative effects on trade competition, inward investment and financial integration.

Brian Ashcroft, Emeritus Professor of Economics at the University of Strathclyde, said: “At a time when there is increasing policy concern about Scotland’s productivity and growth performance a vote to leave the EU would place an unnecessary burden on Scottish companies and economic policy.”

He went on further to say: “The Institute welcomes the new Economy Secretary’s focus on improving Scotland’s productivity performance and reviewing the role of Scotland’s enterprise and skills agencies. It is not new strategies the Scottish economy needs but clear insights and policy action on the implementation of Scotland’s Economic Strategy.”

Paul Brewer, Government and Public Sector partner, PwC in Scotland, said: “While Scotland has edged away from recession in the fourth quarter, the data suggest that for some sectors Scotland is flirting with recession and, in areas of growth, is struggling to grow at a pace comparable to the rest of the UK.

“This has been a difficult trading environment for businesses to operate in and for investors to plan between the oil price, the upcoming European referendum uncertainties and the general tightening of belts in many sectors.

“Some will choose to concentrate on the oil and gas sector but as our report, A Sea Change,showed this week, many actually feel bullish about the future of the sector and have put forward potential solutions to improve results over the coming years.

“The oil sector has had an impact but it is not the only area that needs looking at by the new Scottish Government who now, working together with businesses, need to turn principles into real actions in delivering their strategic blueprint for improving Scotland’s economy.

“The other area that may be of concern is that Scotland is not only faltering at home but abroad, with demand for Scottish goods continuing to be on the decline. With so much of our revenue derived from foreign markets, there will be multiple sectors looking to see what can be carried out to reverse this decline.

“Construction has peaked at a high level of activity driven by infrastructure spending but the services sector does not appear to be able to carry the load – at least in the short term – of shoring up Scotland’s growth. Once we may have looked to the financial sector to help but activity is still at pre-recession levels.”