Scottish economy will escape worst of slump

Economic growth will slow less sharply north of the Border than in the UK as a whole, but the SNP target of matching UK-wide expansion by 2011 will not be met because Scotland will not enjoy the same strong rebound.

These are the conclusions of Strathclyde University's Fraser of Allander Institute, which has just resumed its highly-regarded economic commentary series after a break of nearly a year.

Fraser of Allander, although emphasising its belief that the SNP cannot meet its UK matching target for Scottish growth by 2011, does highlight a seemingly significant improvement in Scotland's trend growth rate since 2005.

Despite highlighting much greater-than-usual uncertainty around its forecasts amid the global economic turmoil, Fraser of Allander is forecasting net job creation throughout the slowdown in Scotland.

It predicts Scottish growth will fall below its long-term average, a trend rate which Fraser of Allander's Professor Brian Ashcroft puts at 1.9% to 2% per annum, as the economy cools against a tougher global backdrop.

Scottish Government data in April showed the economy north of the Border grew by 2.2% in 2007, beating its trend rate but adrift of 2.9% expansion UK-wide.

Fraser of Allander now forecasts Scottish growth will slow to 1.9% this year, before decelerating further to a significantly below-trend 1.7% in 2009. It predicts, on this basis, that Scottish growth will in these years be marginally ahead of respective 1.8% and 1.6% expansion UK-wide.

However, the institute cites an anticipated rebound in UK growth towards its trend rate of 2.5% in 2010 and 2.6% in 2011, and declares: "With UK growth now predicted to be around 2.6% in 2011, the FAI predicts that it is unlikely on present information that the Scottish Government's target of parity with UK growth by 2011 will be met."

Raising Scotland's growth rate to that UK-wide by 2011 is one of the SNP Government's highest-profile policies.

Fraser of Allander, explaining its forecast of a less dramatic slowdown in Scottish growth this year and next, said: "The growth of consumer spending moderates (in Scotland) but not as much as in the UK in view of the relative strength of both the housing and labour markets in Scotland."

Ashcroft told The Herald: "The Scottish cycle tends to be flatter than the UK cycle."

He said Fraser of Allander was anticipating a 20% reduction in consumer spending growth in Scotland - a lesser slowdown in this element than expected UK-wide.

Ashcroft attributed the anticipated faster rebound of UK growth in 2010 and 2011 to the "relatively more dynamic nature of the UK economy, which allows its trend rate to be around 2.5%".

Asked whether he believed the Scottish Government's target of growth parity by 2011 was laudable or unrealistic, Ashcroft replied: "I think it is perfectly reasonable."

However, he added: "We might have some issues about the timescale. The problem for the Scottish Government, and in any small local economy, is what happens is so influenced by what happens in the wider business environment, like demand from important export markets for example."

Ashcroft noted the Scottish economy had outperformed the UK as a whole at the end of 2007, with fourth-quarter growth of 0.9% versus 0.6%, and said: "This is perfectly reasonable for Scotland to match the United Kingdom and to better (it)."

However, he added: "The issue with which the Scottish Government has to grapple is to match the United Kingdom on a sustained (basis)...The issue is about timing. Where we see it at the moment, we think it is unlikely Scottish growth will match UK growth in 2011 and there are real issues about whether Scotland's trend rate can be improved, and to what extent it can be improved."

Highlighting room for optimism on improving trend growth, Ashcroft highlighted an improvement in Scotland's average quarterly growth to 0.61% since the first quarter of 2005 from 0.47% between the first quarters of 1998 and 2005.

The respective average quarterly growth rates UK-wide in these two periods are 0.69% to 0.68%, showing the significant improvement in the Scottish trend rate post-Q1 2005 was not mirrored in the UK as a whole.

Ashcroft said: "We believe there does appear to be some sort of change since the first quarter of 2005, in that Scottish growth has been stronger since then. There has been a relative improvement over that period, which is not present in the United Kingdom."

He said it was "very difficult to understand" what had driven the improvement in Scottish growth since the start of 2005.

Asked whether net inward migration had been a driver, Ashcroft said: "Migration may be a contributing factor. I am not convinced it is the main one."

He added: "Something has happened since 2005 which we need to get to the bottom of ... It is very difficult to understand whether this is coming from the supply side or the demand side or both. I suspect a bit of both."

Ashcroft highlighted strong growth in business services and transport and communications.

Fraser of Allander, which revived its commentary after securing sponsorship from accountancy firm Pricewater-houseCoopers, highlighted the slowdown in growth in Scotland's financial services sector since the start of 2005.

Quarterly growth in financial services has averaged 0.98% since the first quarter of 2005, less than half of the 2.03% figure between 1998 and the start of 2005.

Ashcroft noted this reduction reflected, in part, weakness in financial services in the "two middle quarters" of last year and added: "We are not sure if that is the credit crunch (impacting)."

Asked if slower growth in financial services was a concern, Ashcroft replied: "We have to be careful here. It is certainly weaker in the post-2005 period."

But he pointed out the previous average 2% quarterly rate had been a "hell of a lick", and said financial services was "still performing very well".

The latest Fraser of Allander commentary highlights the major drag which the global credit crisis will have on Scotland.

When it last reported in July last year, before the credit crisis kicked off in earnest, Fraser of Allander was forecasting 2007 growth of 2.5% and still above-trend expansion of 2.3% this year.

In spite of its downgraded forecasts, Fraser is forecasting respective net job creation in Scotland of 8800 this year, 9900 in 2009, and 17,900 in 2010.

Ashcroft highlighted the recent revival in Scottish manufacturing but added this was "something of a shame in some respects given the darker (global economic) circumstances which might knock it off beam again". He believes the Bank of England should hold base rates at 5%, in spite of mounting inflationary pressures, although he said: "Probably we are siding on the side of the inflation risk being greater than the growth risk."

Fraser of Allander forecasts oil could jump to $200-a-barrel by the end of 2008.

However, Ashcroft said it should eventually fall back to $80 to $90, and added: "I am not sure that tightening the monetary screw is necessarily the best way to deal with that (inflationary pressure)."