Scotland’s economy is facing a challenging time. The Scottish ITEM Club – Ernst & Young’s forecasting group – believes that inflation and commodity prices will impede the country’s road to recovery. In its latest report, the Scottish ITEM Club has cut its growth forecast to just 1.7 per cent in 2011. It expects consumer confidence to remain low, but adds that business investment remains the key driver for growth.
According to Dougie Adams, senior economic advisor to the Scottish ITEM Club, “Scotland’s economic output will not match pre-crisis levels until the second half of next year, with above trend growth unlikely before 2013. This setback can be attributed to the squeeze on households, which is proving to be greater than anticipated.
“The upward pressure on commodity prices, reinforced by Middle East tensions and the recent series of natural disasters, has hit consumer inflation figures with a vengeance. The severe winter weather at the end of 2010 also added to the volatility of economic indicators. In addition, we have had to consider the future impact of public spending cuts in our forecast, which are only beginning to be felt in Scotland.
“These factors, combined with the anxiety caused by further anticipated job losses in the public sector and the scarcity of available credit, which are keeping hands wedged firmly in pockets, means that Scotland’s recovery is now almost completely dependent on business investment.”
There are, however, more positive signs from another report out today – the Bank of Scotland labour market barometer. This shows an improvement in the Scottish labour market last month. There was increased demand for new staff, with the number of people finding both permanent and temporary jobs grew strongly.
The chief economist at the Bank of Scotland, Donald MacRae, noted that this was the “seventh consecutive month of improvement”, adding that the Scottish labour market barometer had “outperformed the rest of the UK providing further evidence of Scotland's economic recovery. The number of people employed into both permanent and temporary roles increased strongly in May. Vacancies overall improved while the number of people seeking permanent work fell during the month.”
The report suggests that employment prospects were best in the east of the country, with the strongest rise in permanent salaries in Edinburgh. Recruitment agencies in Aberdeen reported the fastest rise in the pay of temporary staff. Those in Dundee also saw strong increases in both permanent and temporary staff placements last month.
However, those encouraging figures could be coming from a low base. The Scottish ITEM Club points out that the country’s labour market suffered disproportionately over the course of the crisis. On some measures, Scotland could have accounted for nearly a quarter of jobs lost in the UK. That’s a staggering figure, when you consider we have an 8 per cent share of the population.
But it adds that employment levels here have rebounded at a fast rate, with underlying productivity levels increasing across some parts of the Scottish economy, particularly in manufacturing. This bodes well for future investment and the need for businesses and investors in Scotland to continue focusing on the international export market on order to fuel growth.
Despite that, Hywel Ball, Ernst & Young’s senior partner in Scotland, argues that “there is little prospect of a consumer-led recovery. Scotland is relying on those companies that shifted their focus from spending to building their cash resources to channel that money back into the economy, particularly through buying from smaller companies that survive on business-to-business spending.”
“According to survey data,” adds Dougie Adams, “manufacturing should continue to show relatively good growth. The same can be said of business services and tourism holds promise, too, boosted as it’s been by foreign visitors taking advantage of the lower pound and budget-constrained ‘staycationers’.”
Adams also points out that Scotland started to cut public sector jobs well before public spending constraints were introduced across the UK. The report says that public sector employment may be more than 5 per cent lower by mid-2012 than at its 2008 peak, representing a loss of around 40,000 jobs, doubling to 80,000 fewer jobs by 2015.
“The difference in trends in public sector employment and output in Scotland and the rest of the UK is likely to intensify over the next parliament as the Scottish government seeks new approaches to maximise efficiency in the face of acute budget pressures,” he explained.
“While [the loss of public sector jobs] is clearly a big hit to total employment levels, a third of those losses may already be behind us and the private sector is creating jobs again, which means that the adjustment may not be as wrenching as some fear.”
The Scottish ITEM Club report concludes that there is still uncertainty clouding the future. “Further rises in commodity prices would dent global growth prospects,” it says. “The high probability of a default by Greece, and possibly other peripheral economies in the Eurozone, is another worry. At home, we are awaiting the full effects of public spending cuts and tax increases. All of this is adding to the cautious approach to spending decisions taken by households and businesses.”
In Adams' view, “Scotland and the UK’s recoveries are predicated on continuing robust growth in the world economy, continued growth in exports and a pick-up in investment spending by cash-rich companies. There are clearly a number of links in the chain where things could go wrong.”
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