JEREMY PEAT
The Bank of England has spoken and the outlook for UK economic growth has been revised upwards, markedly. Despite post-BREXIT referendum expectations, UK growth in 2016 was robust and the outlook is distinctly decent. So why do I remain exceptionally nervous about the way forward for the Scottish economy?
Two reasons stand out. First, the Scottish economy appears to have detached itself from that of the UK as a whole and to be significantly under-performing relative to the UK just at the time when this really matters so far as the public finances are concerned. Second – and this applies across the UK – the inter-action between BREXIT negotiations and relations with President Trump’s USA provides cause for concern.
Consider first Scotland’s relative economic performance. For the four quarters up to the end of Q3 2016 Scottish Gross Domestic Product increased by a paltry 0.7%, to be compared with UK GDP growth of 2.2%, still below the long term trend. Scottish growth in each of the last two quarters for which we have data was only 0.2%.
The breakdown of the data for Q3 is also worrying. At the end of that quarter Scottish manufacturing output was 5.2% lower than a year earlier, while construction – which had been underpinning our fragile growth earlier in the year – was also in sharp decline. The only growth was in services.
The consumer has been leading the way south of the border. But latest data shows another hugely disappointing Scottish story. In the last three months of 2016 Scottish retail sales declined by 0.5% while sales for GB as a whole rose by 1.2%. As predicted by the Bank of England, inflation is set to edge steadily upwards through 2017. As a result real income growth will be more subdued, and consumption will suffer. Scotland is not well placed to face this problem – especially as unemployment trends are also unfavourable compared to the UK as a whole.
The final piece in this depressing jigsaw is that going forward Scottish receipts from income tax will be influenced by relative GDP growth performance. Continuing underperformance will lead – as night follows day – to a further squeeze on the already strained public finances. The Finance Minister may well find reaching agreement on Budget 2018 even more difficult than was the case last week.
Turning to the wider world, we are now told that we must expect a hard BREXIT for the UK, involving leaving both single market and customs area. It is increasingly apparent that this outlook applies equally to Scotland; there is little if any remaining hope of some special deal whereby Scotland (with or without Wales or Northern Ireland) is permitted or indeed able to make any special deal with the EU.
This means that all EU trade, some 55-60% of Scottish trade outwith the UK, will be to some unknown extent at risk. At least until such time as a trade agreement is hammered out with the remaining nations of the EU, a variety of higher costs and complications will apply. Quite what trade agreement will be achieved with the EU is unknown; just as we do not know when any agreement is likely to be reached. These continuing uncertainties must have adverse effects on inward investment – from around the world not just the EU – and indeed (even more importantly) on domestic investment in critical outward-looking Scottish-owned businesses.
This is the basic BREXIT effect that we have been anticipating since the referendum. Nothing has transpired in recent months to reduce these concerns. But now we have the added complication concerning trade and wider relations with the USA.
Like so many others, my views on the new President are difficult to provide in language acceptable to a family newspaper. Suffice to say that his actions are somewhat unpredictable! However, we have to face up to three clear facts. First, the USA is far and away our largest international trading partner after the EU. Second, as we leave the EU a new trade agreement with the USA will be required, although negotiations cannot formally get underway until we have split with the EU – i.e. around spring 2019 at earliest. Third, the UK runs a major trade surplus with the US – we export markedly more to them than they export to us. This may cause problems in negotiations. Permitting such a UK trade surplus to continue may not be seen as compatible with ‘America First’. What is in the interests of Scotland and the UK (tariff and constraint free trade) may not be seen by President Trump as in the interests of a USA seeking to build trade surpluses and to purge trade deficits.
There are of course added complications. For example Mrs May and her ilk may wish to stay cosy with Mr Trump in order to maximise prospects of an early and favourable trade deal. But staying cosy with someone who’s every word and action appears likely to create adverse reaction across the UK and Europe may be problematic. Does the UK government kow tow to avoid delaying and damaging the outcome of US trade talks, with consequent risks regarding EU relations – including trade? Or stand firm and risk similar trading uncertainties and extra costs with the USA as we already face with the EU? No doubt Mrs May sees this all as yet another reason to curse her predecessor for ‘another fine mess’ that is his legacy to her.
Jeremy Peat is visiting professor at the University of Strathclyde International Public Policy Institute
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