Scottish Agenda: Credit crunch won’t stop at Hadrian’s Wall

By Ian Fraser

The Sunday Times

Scottish Agenda column

April 20th, 2008

THE collective burial of heads in the sand among Scottish business leaders, bank economists and housing market professionals about Scotland’s immunity to the credit crunch is something to behold.

The consensus seems to be that Scotland’s economy is somehow different from that of England, and therefore we’re going to ride out the credit crunch much better than those poor Sassenachs.

The bosses of GSPC and ESPC, residential property bureaux in Glasgow and Edinburgh, have been particularly guilty of such wishful thinking, matched by the bulk of Scotland’s deal-making establishment – including lawyers, accountants and corporate finance advisers.

The consensus among the latter group is that, since mergers and acquisitions activity in Scotland revolves around deals in the £5m-£50m range and banks continue to lend towards such deals, we’re not going to see the sort of slowdown that’s going to be endured by England.

It is likely, however, that the “tsunami” that started with the subprime mortgage fiasco in the US is going to wreak further havoc on the City’s financial establishment, and I don’t believe the remnants of Hadrian’s Wall are going to be enough to stop it in its tracks.

Dougie Adams, economist at the Ernst & Young Scottish Item Club, agreed: “As transaction volumes fall, the Scottish banks are almost certainly going to have to lay people off.

“It is perfectly possible that Scotland’s financial services sector will shed about 5% of its workforce, which equates to between 4,000 and 5,000 people. There will be a multiplier effect in support sectors such as PR, printing and property management. At most, I predict that 10,000 people, out of a total Scottish workforce of 2.3m, are going to lose their jobs.”

The trouble is financial services has been the main engine of Scotland’s economic growth over the past decade. If the sector stalls then the effect on the wider economy could be even more severe than it will be down south. It is for this reason that Adams now predicts Scottish GDP growth will slow to 1.3%-1.5% this year.

However there could be a silver lining, according to Adams, in that the weaker pound will benefit manufacturers and exporters. “It is the strength of the financial services sector that has made sterling strong and squeezed out exports,” he said. “Now I believe we are poised for a rebalancing towards exports and manufacturing.”

The fly in the ointment is that the eurozone may experience a bigger economic downturn than expected. If that happens, Scottish growth could fall further than Adams predicts, since the eurozone is our biggest market.

Even with a housing market correction, Adams, who releases official forecasts next month, remains confident a full-blown recession can be avoided in Scotland.

RBS’s tough call

Unlike their US counterparts, British investors still attach a stigma to companies that dare to cut dividends or launch rights issues. CEOs who do this have traditionally been for the chop.

This week RBS’s Sir Fred Goodwin will put his investors to the test. The Paisley-born chartered accountant will seek to rebuild RBS’s capital strength either through a rights issue of up to £12 billion or through a one-third to one-half cut in the dividend – or even both. This will be harsh medicine for RBS investors, who have already seen the shares nearly half in value since March 2007.

Goodwin has done a deal with the government and the Bank of England, which have promised to take more tangible steps to ease the credit crunch in the UK on condition that bank bosses such as Goodwin make their own shareholders share some of the burden.

Goodwin hopes his plan will be regarded by shareholders as a price worth paying for more tangible government support for the banking sector. However, it remains far from clear that this — from the man who overpaid for ABN Amro even after the credit crisis started to bite — is going to wash with investors. The annual general meeting on Wednesday promises to be a pleasantly rumbustious affair.

Creative finance

At a warm-up event for the National Business Awards for Scotland held at Holyrood last week, Scotland and the UK were criticised for being “followers” rather than “leaders” where innovation is concerned. MSP Alex Neil, host of the event, lamented that the sums invested in R&D in Scotland are too low. To match the spend of countries such as Norway, Scotland would need to rustle up an extra £2 billion per year, he said.

One reason for the lack of funds is that whenever Scotland does lead through R&D or seems on the brink of a technology success story, it often goes pear-shaped. Shares in Wolfson Microelectronics tumbled below their 2004 flotation price following news that the Edinburgh-based chip manufacturer had been frozen out by core client Apple.

Dundee-based tech start-up Idmos collapsed last week. The company had developed a handheld device, CarieScan, which enables dentists to detect tooth decay. Sadly in the harsh commercial world, finding buyers for this sort of invention can be much harder than the boffins behind them predict.

To read this column on www.timesonline.co.uk click here

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