JEREMY PEAT

Uncertainty compounded upon uncertainty points clearly towards economic slowdown and potential recession. That is increasingly the view of informed and objective observers across the UK. Their views are well supported by emerging survey evidence. This points to a slowdown in economic activity since the BREXIT vote, primarily but not exclusively focussed upon business investment, the domestic and commercial property markets, recruitment and consumption – as consumer confidence weakens.

It is best to be clear that this scenario covers Scotland as well as the rest of the UK, indeed somewhat more so than the rUK norm. The fact that Scotland is more at risk can be related to three basic causes. First, the relationship with the EU matters somewhat more here, because of particular strength in (now sharply at risk) inward investment as well as trade; and indeed our disproportionate reliance on EU funding for farming, fisheries, regional development and (crucially) academic research. Second, the uncertainties per se are even greater here than south of that border, because while we know that BREXIT will take place we do not know if that will be with or without Scotland, just as we do not know if Scotland will remain within or outwith the UK. Third, Scotland starts from a markedly lower base than rUK, in that our economy was close to stagnant before the referendum, whereas the UK as a whole was moving along relatively merrily in the first 5 ½ months of 2016.

This relative under-performance by the Scottish economy pre-referendum is well spelt out in the new Fraser of Allander Economic Commentary, as covered by Ian McConnell in Friday’s Herald. Continuing trauma in the oil and gas sector impinging upon domestic activity may be the underlying cause of that under-performance, but the net result, to cite FAI, is that growth in the ‘all-important’ service sector in Scotland in the twelve months to end March 2016 was about half the UK level; and in the year to end May ‘Scotland was the only part [nation or region] of the UK that did not post an improving employment rate or falling unemployment rate’.

It is possible to identify some of the uncertainties. For a starter we have no real idea as to what BREXIT will actually mean at the UK level let alone for Scotland. It is truly incredible that those campaigning for exit had absolutely no plan for ‘what happened next’ in the event of ‘victory’ for their campaign. Nor did the UK Government have any inkling of a contingency plan. It was all left to be worked out in what was deemed by all the unlikely event of a vote for exit.

We are now facing up to the first key uncertainty – what will BREXIT mean in terms of economic and other relationships with the EU and indeed the rest of the world and when will we know more? I agree with the Fraser Institute that negotiations will be anything but straightforward and also that ‘it will only be a matter of time before expectations of reduced integration feed through to day-to-day investment, production operations, R&D activities, employment and household spending decisions.’ That impact is already being felt and enhanced clarity, to temper the impact, is unlikely before at least 18 months have elapsed. A sharp slowdown for the next 2 years is inevitable, not because of BREXIT per se but because of the impact of sheer uncertainty on decision-making by business and consumers alike.

Another uncertainty is as to what UK economic policy will be over this period. As things stand we are bereft of a fiscal policy. George Osborne’s plans have been ditched, but nothing has been put in place in their stead. That will not come until the Autumn Statement, unlikely before end November. Only then will we have some idea as to how far fiscal loosening will go in the wake of the economic slowdown.

We will have more idea as to the monetary stance following this coming Thursday’s Monetary Policy Committee meeting and indeed the publication of a crucial quarterly Inflation Report. Of course the MPC will be hampered in its decision-taking by the lack of a fiscal policy. But they are effectively committed to a cut in interest rates. Unfortunately with rates already as low as 0.5% the cut can only be marginal, unless they contemplate taking rates into negative territory – which I rule out as a venture too far into the unknown.

They may also be considering some form on Quantitative Easing or the like; some means of working on the supply side to encourage activity. However, the real difficulty is on the demand side, due to uncertainties and perceived high risks, and supply side action is unlikely to be effective. Expect no miracle cure from the MPC. One last thought is that in the coming months inflation risks may shift to the upside, given sterling’s depreciation. That risk may be one best ignored while so many other uncertainties prevail.

In sum there are various good reasons why economic performance across the UK will tend to disappoint over the next 2 years, with Scotland likely to feel the pain more than most. And just to emphasise, the uncertainties discussed above do not relate to the impact of whatever BREXIT transpires, but just the uncertainties while decisions are reached. Once the great BREXIT strategy is declared it will be necessary first to consider where Scotland then stands and second what the UK’s exit path will actually mean in economic terms. In other words we will move from one period of major uncertainty to another. I see no light at the end of this tunnel.

Jeremy Peat is visiting professor at the University of Strathclyde International Public Policy Institute