WHAT is the true state of the Scottish economy? If you only read the BBC or the partisan Unionist media, you’d be forgiven for believing the local economy had imploded.
True, figures out recently indicated that growth in Scotland slipped by a whisker (0.2 per cent and subject to revaluation) in the final quarter of last year. Enter the BBC’s economics editor, Douglas Fraser, who was quick to begin his blog by pointing out that if – note the word “if” – there was a second successive quarter of contraction, Scotland would be in a technical recession. Well done, Douglas. It’s absolutely true that if – hypothetically – Scotland did have two quarters of negative growth, it would qualify as a recession. But speculation does not make it so, even if it helps enliven an otherwise vacuous column.
In fact, overall economic growth in Scotland in 2016 was a positive 0.4 per cent despite the fall in oil prices, uncertainties caused by Brexit and more than £10 billion in real terms being sliced off the Scottish Government’s budget by the austerity regime at Westminster. Nor, for the record, does Scotland have an overall tax take greater than England’s: if you take lower council tax into account, it’s cheaper to live north of the Border. So any deceleration in the Scottish economy is not down to the SNP government.
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So how do we explain slowing Scottish growth compared to the UK average? Is the deceleration a purely Scottish affair or is something more general afoot? In fact, the evidence available suggests growth is actually slowing across much of the UK outside of London. The latest PwC forecast projects GDP growth in the key industrial West Midlands to half to 0.8 per cent this year. Ernst & Young (EY) forecasts that the English north-east will have the slowest-growing economy of all UK regions in 2017. In Northern Ireland, growth is already dropping sharply. So Scotland is not alone.
Why this general slowing? Delve down into the recent numbers and you will find that what growth there is in the UK as a whole is based on rising consumer debt. The national savings ratio has now dropped to a historic low as people borrow to spend. This is hardly sustainable. In fact, the deceleration in growth now spreading across the country is a sure sign folk are no longer willing to run up credit card debts – especially given the uncertainties of a hard Brexit.
All this was very predictable. Back in 2015, wage rises ran ahead of inflation. That made people feel more secure, so they borrowed more in 2016. But Brexit has caused the pound to collapse which sent inflation rocketing as imports cost more. With real incomes declining fast, consumers are now reining in borrowing.
IT is true that the deceleration impacted Scotland ahead of some other regions. Why? For at least three specific reasons. First, the Scottish economy took a massive hit with the contraction of the oil industry after 2015. Some 65,000 jobs (directly and indirectly) were lost in the North Sea sector, taking the number of employees down from 440,000 to 375,000. Amazingly, while the Scottish economy staggered under that blow, the economy kept growing. That is a tribute to the attention of the SNP government.
Second, there is evidence that Scots have been more canny about expanding household debt, especially since the Brexit vote. That has impacted on consumer spending and growth. For instance, anecdotally, in the six months after the June Brexit vote, the number of decrees against debtors in Scotland fell to a record low, suggesting consumers had grown very cautious. In which case, after English Brexiteers get over their misplaced euphoria, the rest of the UK will soon follow.
Third, it is very clear that Scottish businesses have been less optimistic than those down south – but that has nothing to do with the constitution. The Scottish economy is far more open to trade that the UK as a whole and Scotland (unlike profligate Britain) runs a consistent current-account trade surplus from its exports. So when the global trading economy started decelerating after 2015, Scotland caught a cold. However, the latest index of Scottish business confidence shows a rise in the first quarter of 2017, ending an almost two-year decline in business optimism – coinciding with the FM’s call for a second independence referendum!
If Scottish firms are getting more optimistic, what about foreign investors in Scotland? If they were worried about Scotland gaining self-determination, it would surely show up in how much cash was flowing into the country from abroad.
Start with calendar year 2015 – the most recent data – when Scotland achieved an all-time high for the number of new Foreign Direct Investment (FDI) projects, as reported independently by E&Y last May. A total of 119 projects were secured – a 51 per cent increase on the previous year. Clearly no-one was worried that Nicola Sturgeon had begun campaigning for a third consecutive SNP government at Holyrood. In fact, in 2015, Scotland surged past the south-east to claim second place behind London for FDI.
NOW here’s a funny thing. A mere three months after that Ernst & Young report in May 2016, Liam Fox’s new Department for International Trade published its own stats on regional inward investment. This “official” report rubbished Scotland’s performance. Using a different accounting period and different methodology – which counted foreign corporate takeovers the same as investing in real plant and machinery – Mr Fox claimed that Scotland’s FDI had “plunged” (to quote The Daily Express).
We don’t yet have the full numbers for Scottish FDI after the Brexit referendum period. My guess is that Scotland has seen a reduction over the past 18 months in new manufacturing FDI projects, partly because of shifts in the petroleum sector and partly because of a deceleration in the global trading economy. Equally, we have continued to attract key high-tech research projects, which you would think are the most sensitive to economic uncertainties. Since the New Year we have seen health IT data analytics company Spiritus, the geoscience firm ION, life sciences player PPS, and American communications leader Xilinx investing north of the Border.
According to Ernest & Young “Scotland’s sparkling performance in attracting software projects and business services bodes well for the economy and skills base”. But here also lies an issue. Scotland is increasingly good at attracting long-lead R&D investment, but less good at attracting basic manufacturing jobs. This is because FDI usually gravitates to where there is already a manufacturing agglomeration, as in car manufacturing in the English north-east. This explains why the Conservative government was so desperate to accommodate Nissan over Brexit costs.
But when a hard Brexit finally and irrevocably disrupts UK supply chains in motor manufacturing, FDI in the English north-east will collapse. It is Scotland that, with its attractiveness as a research base, will continue to suck in FDI after independence. Our task is to turn that FDI into longer-term manufacturing jobs locally. For that we need independence and control over the levers of economic power. And to ignore the Unionist media propaganda that sells the Scottish economy short.