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Uncertainty may 'puncture' progress

‘Political prickliness’ adds to slowing growth

Donald MacRaeScotland’s economy is expected to grow this year at its fastest rate since the financial crisis in 2007 though “political prickliness” is among the factors slowing down the pace of expansion.

The EY Item Club and Bank of Scotland today identify some obstacles facing the economy next year, including slow export growth, weakness in Europe and other geopolitical difficulties.

The Item Club, which uses the Treasury model to develop its forecasts, also warns that the potential for “domestic political upheaval” is an increasingly crucial feature of the Scottish and UK outlooks.

Dougie Adams, senior economic adviser to the Scottish Item Club, says: “The prospect of an EU referendum and the challenge of developing a stable framework for enhanced devolution, not just to Scotland but to the other nations and regions of the UK, are becoming the main impediments to investment spending and resultant short and medium-term growth.

“Political stability and predictability has long been one of the UK’s comparative advantages, particularly in the attraction of foreign investment. Political prickliness might yet puncture the investment swell factored into the forecast, undermining continued recovery in Scotland and the UK.”

EY expects Scotland’s economy to grow 2.8% this year, better than any year for seven years, but to fall back to 2% next year. This compares to 3.1% this year and 2.4% in 2015 for the UK economy as a whole.

Bank of Scotland’s purchasing managers’ index shows business activity in the private sector economy rose in November at one of the slowest in rates in the past two years, affected by a slowdown in new orders.

The bank said the primary area of weakness was manufacturing where new orders fell for the third month in a row, partly reflective of a further loss of new export business.

However, the employment situation continued to improve in line with the trend since December 2012. The rate of job creation resumed growth from October’s ten-month low, to the fastest since August.

Donald MacRae (pictured), chief economist at Bank of Scotland, said:  “Manufacturing sector output grew despite a fall in new order inflows while new export orders fell for the fifth successive month illustrating the challenge of increasing exports to a stagnating Eurozone economy.   All sectors employed more people in a welcome sign of continuing high levels of business confidence.  The recovery continues but the pace has eased slightly.”

Adams said: “Scotland may yet experience a Quebec-style neverendum effect, but the possibility of an EU referendum means the performance of the UK economy as a whole, particularly investment, is a hostage to political flux,” he says.

The EY report notes that the Scottish economy has enjoyed a ‘good run’ and while the EY Scottish ITEM Club believes that growth will persist, it proposes that the pace of expansion will ease.

It attributes this potential deceleration to the prospect of consumer caution in the face of interest rate increases and depleted savings, weaknesses in key European export markets and the aforementioned political uncertainty.

And while the report does identify lower commodity prices, high and rising levels of employment and the prospect of wages outpacing increases as mitigating these pressures, it laments the weakness in exporting Scottish goods to overseas markets.

Jim Bishop, Scotland senior partner at EY, comments: “UK growth has helped increase domestic demand for Scottish products, but conversely, the slowdown in key emerging consumer markets like China is having an adverse impact on Scottish luxury goods exports. The predicted rise in Scotland’s economic output is cause for cheer, but the country’s narrow export base is preventing it from really taking off.”

The EY Scottish ITEM Club anticipates that the professional and support services sector will continue to lead the growth charge, with output forecast to expand by 4.3% in 2015. Transport and communication (3.9%), construction (3.4%) and financial services (2.4%) are also forecast to grow in excess of overall growth.

Commenting on these reports deputy First Minister John Swinney said: “Economic recovery in Scotland is now being sustained with the latest GDP figures showing Scotland’s economy growing continuously for two years. With the 26th month of expansion in the PMI, and the most recent forecasts for Scottish GDP growth having been revised up, the economic outlook remains positive.

“Supporting economic growth, by effective work with business and by tackling inequalities, is integral to this Government’s approach to creating a more prosperous and fair society.

“The focus of our economic strategy on innovation and internationalisation is essential to address the headwinds to the recovery, particularly weaknesses in key export markets as well as political uncertainty at the UK level.

“We will continue to do all we can to ensure the positive trends continue, but with further job creating powers, we could do even more to help families throughout Scotland.”

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