By Colin McLean

Should we be worried about the UK economy?

A recession - however technically defined - hits business and consumer confidence, and Scotland’s economy is closely tied to its neighbours. But is the UK really doing worse than international competitors?

The next 12 months will see heated debate on economic performance - possibly without shedding much light. Data tends to be interpreted through political beliefs or worldview, adding to the confusion. And the recent record of economic forecasters has been mixed. This unpredictability comes as governments and central banks seem less in control, with geopolitics upsetting expectations.

The UK economy has been struggling for several years, flattered from time-to-time by the Bank of England boosting short-term growth as it did following the financial crisis and during the pandemic. But printing money has done little to sustainably improve growth and investment, which have been weak for years. Stagnating real income and weak productivity seem deeply embedded. A dull post-Covid recovery saw the UK again labelled as the sick man of Europe. Even inflation appeared more entrenched than its international peers.

But more recent data suggests that UK comparisons were distorted by leads and lags in how governments responded to inflation in energy and food production. As these unwind, the inflation pattern across Europe now looks similar. And there are signs of some pick up in business investment, with the UK not out of line with Europe. The UK has been helped by a return to real wage growth, and consumer confidence in leisure spending. Revisions to the data now place the UK nearer mid-table than back-marker.

Scotland is performing above the average of the UK regions. But the resilience of the economy alongside continuing inflation and a tight labour market does have some negatives for Scotland’s finances. Inflation drives higher tax receipts at a UK level but bears unevenly on public spending. The structure of devolved services means that higher UK tax receipts do not fully alleviate the pressure that inflation puts on Scotland’s public service costs. All the UK nations may share the same currency and monetary policy, but there are fiscal stresses. These put pressure on services and public investment.

Some of the gloom on the UK economy has come from the decline in importance of the London stock market. After decades in which Scotland lost its regional exchanges, and many of its listed companies left the market, now it is London’s turn to shrink as it faces competition from rising international centres.

Several multi-nationals are considering a move to make New York their primary listing, and indeed some have already left London. Dealing and liquidity are key for stock exchanges; business and fundraising naturally gravitate to the most active centres. It is a negative for the UK, but as yet hard to quantify.

However, with few Scottish-headquartered listed firms reliant on the London market to raise finance, the trend for listings to move across the Atlantic may have little direct impact on Scotland. In the Budget, UK Treasury has promised action to support London, but years of neglect will not easily be reversed. After the UK election, tough decisions will need to be made on taxes, borrowing and public expenditure. London’s decline in status now makes it harder for the UK to attract international investors.

Many other mature economies are also struggling to adapt to a riskier, low-growth world. And there are signs of bubbles in other economies, such as technology and AI in the US, that could rapidly unwind. Certainly, current UK performance is disappointing and limits action on sustainability, inclusion and productivity. Nevertheless the flat UK economy continues to confound the sceptics who have repeatedly forecast a collapse.

Colin McLean is a director of SVM Asset Management Holdings