• Text size      
  • Send this article to a friend
  • Print this article

No guarantee of a recovery

Looking forward to the year ahead brings back less than positive memories of going through this same process a year back.

As then I hope that the UK economy has truly reached the bottom of this nasty cycle and that slow upward progress is now feasible. Again we look for stability being restored in the eurozone, with a solution found to the Greek problem that does not – one way or another – lead to subsequent repetition of the same problems for Spain, Italy and the other weaker brethren in the zone.

Meanwhile, uncertainties remain in the US, with descent over one fiscal cliff averted, but plenty more dodgy moments ahead – even when the new Congress is in situ.

All of these issues and risks remain in place to cast their shadows over the outlook for the Scottish economy. Somehow we need to return more focus to resolving domestic priorities. But we must do this while both keeping a weather eye on the external outlook and continuing the process of examining the host of issues requiring clarification before a meaningful and informed debate on the independence referendum can take place.

We must end 2013 with a much deeper understanding of the key issues upon which referendum decisions should be based – including the multitude of economic matters – than is the case as we enter the new year.

The UK economy ended the year back where it began – in stagnation. After a return to formal recession in the first half of the year – two consecutive quarters of negative growth – there was a growth spurt in Q3. However, this spurt was (rightly) greeted with muted acclaim, even by the Prime Minister and Chancellor. They knew the growth was achieved only thanks to a whole catalogue of exceptional factors I listed and examined in this column at the time the data were released.

The inevitable consequence of these factors was that growth in the last quarter of 2012 was negligible or negative. We still await the formal pronouncement, but a slip back to stagnation is widely accepted as inevitable. Hence the key question is whether we can escape from the depths to which we have descended and at long last start a slow but sustained recovery.

Sadly, the latest evidence is not wholly encouraging. The Bank of England Agents' survey for December refers to annual manufacturing output growth remaining "marginally negative" – buoyed by demand for exports but with weakening in the euro area affecting volumes.

Meanwhile, the agents saw at best modest signs of growth across retailing, the housing sector and business services, with construction continuing the decline it had suffered throughout the year.

Investment intentions remained subdued, with weak demand for borrowing among smaller firms. The Funding for Lending scheme – one of several attempts in 2011 and 2012 to channel funds through the banks to encourage investment – may be having some (welcome but limited) impact on the mortgage market but this is doing little to bolster housing demand or prices and the impact is yet to feed through at all to business lending.

This is all both depressing and familiar. We have been here a good while now.

The key to exit from this slough of despond is enhancing confidence. This could stimulate a mild acceleration in consumer demand. Confidence remains on the floor, while household saving rates are at historically high levels as debt is repaid. Likewise with business; many companies have stuffed balance sheets, could access bank lending and could invest, but do not do so because they have no confidence in market demand justifying additions to capacity.

Enhanced confidence will come when businesses and households have cause to believe better times lie ahead. Domestically it is difficult to see any grounds for such expectations, as the public sector funding squeeze is tightened and other components of demand remain notable primarily by their muted state.

So again, in the absence of positive UK Government interventions, we must look abroad for hopes of some stimulation. Relief will not come from the eurozone – at least during the early months of 2013. A return to recession there looks nigh on inevitable. China may avoid marked deceleration, but the global economy will be increasingly looking to the US for signs of hope. Surely even the diehard extremists on the right of the Republican Party must see the necessity for some sustainable longer-term arrangements on the budget deficit front?

As in recent episodes of this type there has been a first limited victory for reason. But what happens next? This time around the extremists seem both more extreme and more powerful, but I am trying to retain a faith in rationality and good old American common sense. We shall see.

In sum then, the most optimistic outlook for the UK is some gentle growth through the year ahead – even 1.5% in total over the year would be cause for real celebration. This would be based upon the US and China bolstering global demand and the eurozone avoiding catastrophe and continuing to inch forward.

This global story, coupled with more and more direct efforts at home (UK and Scotland) to boost business investment and encourage a gentle pick-up in consumption, could mean we have seen the worst of this long-lasting economic episode: 2013 could be the beginning of recovery, but that suggestion comes with no "money back if disappointed" guarantee.

l Jeremy Peat is director of the David Hume Institute.

Contextual targeting label: 
Finance

Commenting & Moderation

We moderate all comments on HeraldScotland on either a pre-moderated or post-moderated basis.
If you're a relatively new user then your comments will be reviewed before publication and if we know you well and trust you then your comments will be subject to moderation only if other users or the moderators believe you've broken the rules

Moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours. Please be patient if your posts are not approved instantly.

134057