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Scotland's economy edges close to recession - but growth forecast to return in the coming months

29th June 2017

Fraser of Allander Economic Commentary: Scotland's economy edges close to recession - but growth forecast to return in the coming months.

The economic news since the Fraser of Allander's last Economic Commentary in March has continued to paint a relatively disappointing picture for Scotland, according to the latest report published today by Scotland's leading independent economic research institute.

Scotland's economy shrank in the final three months of 2016, with the slowdown evident across most key sectors. The latest indicators of consumer confidence and business activity suggest that growth has returned during the first half of 2017 but remains fragile.

Such weakness can no longer be explained solely by the downturn in the oil and gas industry. Nor, given the relative resilience of the UK economy, can it be the result of Brexit (yet). Instead it would appear that the economy is stuck in a cycle of low growth, weak investment and fragile confidence.

The one bright spot has been the labour market which continues to hold up remarkably well with unemployment at a record low and employment growing.

However, over the past two years there has been a movement from unemployment into inactivity, whilst the recent growth in employment has been largely in self-employment - some of which is likely to be relatively insecure.

At the same time, productivity growth remains poor not just by international standards but also by Scotland’s own recent trends. This lack of improvement in productivity is feeding into weakened pay growth, putting further downward pressure on household incomes.

With the effects of any Brexit headwinds and rising inflation likely to become more significant in the coming months, the resilience of the Scottish economy is likely to be severely tested.

Whether or not Scotland formally enters recession when the next set of data are released is in the balance. We believe that the Scottish economy will still grow over the year as a whole (and more quickly than last year) but further negative quarters of growth are highly possible.

In such challenging economic times, it is vital that businesses focus on the long-term drivers of growth including: accessing new external markets, grasping the opportunities from the rapid expansion in new technology and improving firm specific efficiency and productivity levels.

It is also right that businesses demand much more of a policy effort from government. Recent debates have understandably focussed on the general election, the constitution and Brexit.

However, what our economy needs - more than ever – is clear policy strategies backed-up by concrete action. The Scottish economy has been flat lining for two years. The EU referendum result was known 12 months ago. But what genuinely new policy actions – with immediate effects – have been taken in response? And what has been their impact?

To what extent have both the Scottish and UK Government’s changed their economic strategies to cope with a world where we will no longer be part of the EU?

With Brexit undoubtedly adding new risks and new opportunities, ‘policy as usual’ is no longer an option. A renewed focus on how both the Scottish and UK Governments can use the powers at their disposal to support the Scottish economy is urgently needed.

Fraser of Allandar Institute Web site - https://www.strath.ac.uk/business/economics/fraserofallanderinstitute/

See the latest report at https://www.strath.ac.uk/media/1newwebsite/departmentsubject/strathclydebusinessschool/fraserofallander/FEC_Vol_41_No_2.pdf

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