By Colin McLean

A RESURGENT US dollar means the pound is again sinking – does that matter for Scotland?

Turmoil in the global economy appears more of an issue for manufacturing nations, as supply chains are hit and the prices of resources rocket.

But even nations with invisible exports such as tourism cannot escape the impact of currencies and input costs. These are about to bring some big problems – it will be important Scotland can adapt to offset that.

It now matters little for Scotland’s lack of direct monetary control, which has historically left us as a bystander to Bank of England policy. Against the challenge of imported inflation there is little that any central bank can do. Higher interest rates would simply add to the cost-of-living burden without sending any useful signal.

When a global slowdown eventually eases inflation, the problems will be growth and unemployment. Only in the US is the Federal Reserve fighting more conventional overheating of its domestic economy, driving dollar strength.

The European Central Bank has the additional difficulty of defending the euro – easy previously when it could buy bonds of weaker countries like Italy, but a problem in the current phase of policy when it no longer wants to create money. The baton for economic growth has passed to governments.

We can expect more direct government intervention to control specific prices, familiar to those with memories of the late 1970s.

However most people alive today did not experience that extreme of UK inflation and price controls, increasing the risk that policy mistakes will be repeated. It was a period that wiped out some of Scotland’s heavy industries, along with energy-intensive activities such as carpet manufacture and tomato growing. Energy and commodity prices can change rapidly but it takes years for economies to adapt.

Also replacing the work previously done by central banks is targeted support for specific sectors or companies deemed in the national interest.

The UK’s financial support for Jaguar Land Rover, for example, represents a government intervention in the price and supply of credit, guaranteeing £500 million of bank lending.

Signs are that a liquidity squeeze will soon make it much harder for companies to borrow, starving some businesses of finance. It is not just that interest rates may rise, but that investors and banks may become more risk averse whatever rates are being charged.

Many technology and growth businesses are already cutting back on investment or laying off staff to preserve cash. Economic growth may stall without the technological development that underpins productivity.

We can expect government to intervene to mitigate the worst of this, but will they back the right sectors? Moving from a largely market-based economy to one with more intervention brings risks; it is tempting to prop-up every large employer, but healthy recovery from a recession usually requires some business failure.

Trade problems add to the challenges. The US has signalled a new policy of friend-shoring, a plan to link its values to trade that represents an overturning of the free trade approach embodied in the World Trade Organisation.

This could bring new trade frictions to Scotland as global growth slows.

In the face of this great challenge to national prosperity, there are no proven solutions.

It will be tempting to seek to preserve all of today’s industries and jobs, to insulate citizens as much as possible from the pressure in living standards. But the nations likely to recover fastest will be those that manage to adapt during this economic upheaval. That will mean attracting talent into the country and leveraging sectors with the most promise. Scotland’s universities, for example, create invisible exports via international students and foster research that can be a catalyst for growth. They may be helped by a lower pound, as could our tourism sector.

There is opportunity ahead, but clear vision and focus will be needed.

Colin McLean is managing director of SVM Asset Management.