Scotland’s avoided economic meltdown … now let’s look to the past for future inspiration

By Ian Fraser

Published: Sunday Herald

Date: December 27th, 2009

Events like Edinburgh’s Festival Fringe enjoyed record ticket sales in 2009; image courtesy of BBC

Even though the recession has now been under way for at least 18 months, and this has been the longest and deepest downturn since the Second World War, Scotland has so far avoided the Schumpeter-style “creative destruction” that many were predicting this time last year.

While it probably doesn’t feel like it to workers who have lost their jobs, the industrial and economic carnage many commentators were predicting has not materialised.

The bad news is that many small -– and some large -– businesses complain they are having to contend with bankers who, despite receiving billions in taxpayer bail-outs, have metamorphosed from generous pushers of credit into mini-Mafiosi demanding the equivalent of protection money. For some firms, this has hastened their demise, and any respect they had for bankers has gone out the window.

Weak global demand has undermined Scottish exports; manufacturers have been collapsing at a pace not seen since the 1980s; the funding for critical infrastructure projects, including the second Forth Bridge, is uncertain; and corporate self-esteem has suffered as a result of the collapse of our two once iconic banks. Overall, Scotland’s economy will probably have shrunk by a whopping 4.9% this year, compared to a fall of 4.6% for the UK, according to figures from the Ernst & Young Scottish Item Club.

So what about the good news? Well, perhaps most importantly, unemployment across Scotland has so far risen only to 6.9%, well below the current OECD average of 9% and indeed, it even fell in the third quarter of this year. Certain sectors of the economy have fared surprisingly well in the past year. Tourism, for example, had a good year, with sterling’s weakness making Scottish and British holidays more attractive both to euro-rich European visitors and to “staycationers” from elsewhere in the UK. The Homecoming and Gathering may have been over budget, but they clearly played a part.

Oil and gas is suffering from a lack of access to finance, and particularly a lack of working capital, but the sector has held up surprisingly well. Scottish-based multinationals including Wood Group, PSN, Cairn Energy and Dana Petroleum have turned out to be relatively immune to recession thanks to their geographic spread and the high oil price.

Areas such as renewables and biotech offer hope for the future, though without the lifeblood of bank funding and public sector investment, they are unlikely to become as economically important as First Minister Alex Salmond imagines, at least in the near term.

The past 12 months have certainly taught us some harsh lessons. The first is that easy access to credit does not equate to business success -– loans still need to be paid back.

Pre-credit crunch, Scotland was stuffed with believers in “the illusion of unlimited liquidity”, including almost anybody involved in property, construction, hotels, football and banking — and most of their empires have turned to dust.

During the decade-long credit binge, the hallucinatory drug of choice for people in these and other sectors was leverage (plain old borrowed money to you and me). They also seemed to be dependent for their growth on the quick fixes of acquisitions and speculative developments. Once the tide of easy credit went out, a great many people in these sectors have been revealed to have been “swimming naked”, to paraphrase Omaha-based investor Warren Buffett.

Now a different approach to business growth must emerge and it’s probably going to have to be “back to the future” for many of Scotland’s entrepreneurs.

Robin Barr, who led soft drinks group AG Barr without too many hiccups for the best part of 50 years, provides a good role model here. When he stepped down as Barr’s chairman in May 2009 he told me he had repeatedly resisted the blandishments of silvery-tongued investors, investment bankers and analysts that he should gear up Barr’s balance sheet and embark on a Goodwin-esque acquisition spree. Unsurprisingly, the very idea got short shrift in the Irn-Bru-maker’s Cumbernauld head office.

Barr told me: “In the go-go years, we were plagued with comments that having cash on our balance sheet was ridiculous, that we had an inefficient balance sheet. It was absolutely dreadful. Now we’re finding that old-fashioned Scottish conservative attitudes have something to be said for them.”

So what of the future? Not only are we going to have to discover a different drug to propel Scotland’s future economic growth, we’re also probably going to have to accept that economic recovery is going to be much more stuttering and anaemic than our Panglossian Chancellor Alistair Darling predicted in his recent pre-Budget report.

There are plenty of bearish commentators out there who are convinced that once the twin crutches of quantitative easing and the bank bail-outs are taken away, the patient that is the Scots economy might struggle to stand on its own two feet.

Scotland is much more vulnerable to the short-term effects of future Government spending cuts — which are desperately needed if the UK is to have any chance of retaining our AAA credit rating. This is simply because of the sheer size of the public sector here. Overall it looks like 18%-20% will have to be trimmed off Scotland’s’ public sector budgets from 2011, which could spell disaster for many private sector firms, ranging from vehicle repairers to stationery suppliers to consultancies, which specialise in selling to the public sector.

There will be pain in the short term but David Watt, the director of IoD Scotland believes this could unleash much needed entrepreneurial energy. He said: “I genuinely believe that will drive talented people out of the public sector and into doing useful and wealth-creating things like starting their own businesses.”

So my overall message is that, even though Scotland has ridden out recession in reasonably good fettle so far, it is far too early to count our chickens on recovery. Some more inspired and imaginative thinking from the denizens of Holyrood and Victoria Quay would be welcomed, to say the least.

• This was the main Business Comment in the Sunday Herald (in edited form) on Dec 27th, 2009. To read on Herald Online, click here

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