What do forecasts of slower global growth mean for Scotland?

Although there has been a little more optimism recently on the UK economy, it still looks likely to grow at just 1% next year, with some stimulus from the Chancellor being offset by persistently poor productivity and lacklustre business investment.

Despite recognition of these perennial problems, there is little sign of improvement ahead. Government and Bank of England have few short term levers on business confidence, although elections themselves often trigger a reappraisal of prospects.

Part of the problem is a continuing liquidity squeeze, with banks trying to shrink their balance sheets, cutting back on riskier or less profitable lending. The pandemic is in the rear view mirror, but the financial excesses it brought and misallocated capital have not yet been fully unwound.

This is perhaps most obvious in a reset of valuations on the property and private equity sectors. Against a background of write-downs and losses, it will be much harder for young businesses to get financial backing.

Even for bigger businesses, UK stock market weakness has made fundraising more expensive. Post-Brexit, wealth managers and pension funds have moved more of their money into overseas shares and out of the London stock market.

The UK is now only about 4% of the global equity market, with the number of listed smaller companies falling 30% over the last five years. New share issues, mergers and takeovers, and fundraising for growth have all shrunk.

Scotland is less reliant on the UK stock market than it was a decade or two ago, but this recent setback for London suggests there is now little value in Scotland reviving its own exchange.

Scotland may still be able to access investment for viable sustainability and alternative energy projects. But, without a healthy market for share issues, smaller companies will be reliant on banks for growth capital. It is not clear that Scotland’s bank sector has the appetite for this support. The most promising start-ups may still be backed by angel investors but most young companies are facing more expensive finance, which limits options for innovation and expansion.

Scotland has successful export industries and is a winner in hospitality. Our universities have moved up the global rankings, attracting many foreign students. This international exposure reflects Scotland’s entrepreneurship and drive but brings some uncertainty.

The global economy is fragile; in the face of a shift to a multipolar world order, geopolitical and political risks remain high. In 2024, 40 countries are holding national elections, which will bring changes in policies and tax. Even for businesses less exposed to overseas markets, there is potential for shocks in commodity and energy prices.

The pressure to grow in a low-growth world brings strategic challenges for businesses. Inflation has not disappeared but, before long, disinflation could reassert itself in some sectors. The relentless pursuit of growth may drive short-term decisions and risk, as managements raise prices or cut offerings. Consumer products in supermarkets using shrinkflation strategies, reducing product sizes, are one example. If continued, the end game with unrecognisable product offerings is likely to destroy brand value.

Similarly, cutting away what are seen as less profitable customers, units, or layers of staff that are viewed by management as costs and not customer service, can undermine customer trust. In this restructuring version of shrinkflation, management aims to keep the parts of a business that seem to be more profitable or faster growing. But a flat economy is a headwind for any business chasing growth. The year ahead might not be the time to fight against the economic trends.

Bad strategy often stems from companies failing to recognise a low-growth reality, and responding by rebasing incentives to pay big executive bonuses based on short-term results. In current economic conditions many incentive schemes look unreasonable and have shifted the balance of reward too much in favour of management and away from other stakeholders.

Boards may not realise the folly of this until the long-term damage is seen.

Good business stewardship should involve more focus on resilience and effective operational delivery – priorities that must be emphasised in executive incentives. If deflation re-emerges, the businesses that have continued to pursue aggressive growth strategies will be punished. Three years of rising inflation may have created the wrong mindset; a return to the previous disinflationary environment would create losers, too.

The immediate opportunities for Scotland and its businesses seem to be in areas that involve investment and will require considerable capital.

Upgrading homes with heat pumps and better insulation might be the best long term investment for the nation, but it is a challenging calculation for individual property owners who may not see an immediate pay-off.

Access to UK credit – Scottish Government borrowing - is needed to underwrite climate initiatives. A longer term perspective is needed for this, but it must have sound financial underpinning.

Financing the greening of Scotland’s energy has to date largely been done through energy utilities and surcharges, but that process may soon compete with demands for a social energy tariff. Securing investment and fairly apportioning the cost of the green transition is becoming more complex. Scotland’s economic growth may depend on finding pricing solutions and new capital for energy transition.

2024 will bring a weak global economy as debt remains high in the developed world, but with potential for Scotland to perform better than many European nations. Capital will likely remain tight, but stimulus could come from the green transition provided that innovative approaches to funding can be developed.

Perhaps the biggest boost might come from progress in productivity – it has perennially held back the UK, and Scotland shows a similar pattern. Scotland’s economy must adapt to a low-growth world, and work on the levers of investment and productivity.

Colin McLean is a director of SVM Asset Management Holdings