Scotland is well placed to survive economic Armageddon

By Ian Fraser

The Sunday Times

6th July, 2008

The country will be more resilient than other parts of the UK to a downturn

Talk of impending economic Armageddon in the UK intensified last week with reports suggesting activity in the important services sector has slowed considerably and the FTSE 100 index officially entering bear market territory. But economists in Scotland say that the Scottish economy will be more resilient than that of the UK as whole.

The UK picture darkened after retailer Marks & Spencer said like-for-like sales had fallen by 5.3% and after investors said they would not support an emergency £500m rights issue from housebuilder Taylor Wimpey, as well as the confirmation of thousands of job losses across the housebuilding and construction sectors.

Further bad news emerged on Thursday when the Chartered Institute of Purchasing & Supply said services sector activity has slumped to its lowest level since 9/11, suggesting that the UK may have already entered recession. There was also evidence from the Bank of England that the credit crisis is far from over.

But John McLaren, an economist at Glasgow University and a member of the Centre for Public Policy in the Regions, said that in economic downturns, Scotland performs relatively well.

“The trouble is that when economic growth returns, Scotland is once again likely to revert to being outperformed by the UK as a whole,” he said. “One reason for this is that the larger public sector in Scotland acts as an anchor. It’s a drag when things are going well, but it’s a benefit when things are going badly.”

Dougie Adams, economic adviser to the Ernst & Young Scottish Item Club, said: “Scotland was much less affected than the rest of the UK in the 1990s downturn. Between 1990 and 1992 the Scottish economy expanded by nearly 0.5%, compared with no growth in the UK. There is evidence to suggest that the current episode will be similar.”

He said Scotland is expected, for the first time in seven years, to match UK growth next year. But the difficulties and uncertainties facing the financial services sector may be a significant drag on the economy, while higher transport costs weigh relatively more heavily on Scotland than on the UK as a whole.

It therefore seems unlikely that the government of first minister Alex Salmond — who last October described Scotland’s economy as a “Celtic Lion” — will hit its target of matching UK growth by 2011.

The irony for Salmond is that the economy will almost certainly meet his target of outperforming the rest of the UK in the three years before that deadline. Presumably, when the relatively modest goal was set last autumn, he had no idea Scottish growth would exceed UK growth in 2008, 2009 and possibly also in 2010.

But after that, the consensus among economists is for a strong economic rebound in England, where 2011 growth could surge back to 2.6% or above.

Professor Brian Ashcroft of the Fraser of Allander Institute, said: “It is unlikely on present information that the Scottish government’s target of parity with UK growth by 2011 will be met.”

The first positive sign for Scotland’s economy came when Nationwide Building Society issued figures for the UK housing market last Tuesday. These showed average house prices rose in Scotland in the 12 months to mid-June. The growth of 0.6% was anaemic, but Scotland was the only one of 13 UK regions monitored by Nationwide to be in positive territory.

The next day, the Scottish government released figures showing Scottish manufactured exports grew by 2.3% in the first quarter of 2008, when compared to the final quarter of 2007. In the four quarters to March 31, Scottish exports grew by 3.2% versus the previous 12 months.

Sterling’s collapse since the credit crunch set in last August has made imports and overseas holidays more costly, but it has boosted Scotland’s exporters.

Liz Cameron, chief executive of the Scottish Chambers of Commerce, said: “The figures underline the fact that many Scottish businesses are thriving and taking advantage of the market opportunities that exist.”

Jim Mather, the Scottish enterprise minister, said: “The export performance demonstrates that the Scottish economy is continuing to show resilience at a time of global uncertainty.”

The figures on exports and house prices came on the back of recent reassuring forecasts for the Scottish economy from, among others, the Fraser of Allander Institute at Strathclyde University and the E&Y Scottish Item Club.

Scottish retail sales appear to be holding up well. On June 17, the Scottish Retail Consortium released figures showing that total retail spending north of the border increased by 8% annually in May.

The FAI sees Scotland’s economic growth slowing to 1.9% this year and to 1.7% in 2009, picking up to 1.8% in 2010 and returning to the 1.9% trend in 2011. The Ernst & Young Scottish Item Club sees GDP growing 1.5% this year and by 1.6% in 2009.

Professor Donald McRae, chief economist at Lloyds TSB Scotland, said: “The slowdown is affecting service businesses more severely than manufacturing. Although the production and services sectors are experiencing different conditions, both continue to grow. However, concerns about cost inflation are equally apparent among both production and service businesses.”

Mary Campbell, founder and managing director of corporate finance house Blas, is gloomier than most about Scotland’s prospects. She said the country is the most exposed part of the UK to the financial services sector outside London. So it could face a rocky ride ahead.

Campbell said: “In Scotland, the credit crunch is now affecting deals of all sizes. Multiples are falling and banks are changing their views on what they want to lend from one week to the next. They are increasingly taking companies to the wire on deals before choosing not to proceed.”

Hywel Ball, of Ernst & Young Scotland, said signs of a downturn in emerging markets such as China and India would hit exporters. “If the emerging markets prove to be more sensitive to slowing developed world growth, if the US fails to respond to fiscal stimulus and lower interest rates, or if the rise of the euro causes growth in the Eurozone to stall, it will add to current pressures with prospects for Scottish exporters particularly hindered,” he said.

This article was published in The Sunday Times Scotland on July 6th 2008. Read it online here

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