GDP growth revised down from 2.5% to 1.9%
Scottish growth to be lower as oil price slump takes toll
Growth in Scotland has been curtailed mainly by the oil price slump which has forced the economy to diverge from wider UK growth trends, according to the latest Economic Commentary from Strathclyde university’s Fraser of Allander Institute.
On the back of the report’s generally bearish tone the Institute has revised its growth forecast downwards and one of the authors urges the Chancellor to rethink his tax credit cuts and the Bank of England to keep interest rates at the present level.
While construction has held up because of public infrastructure spending, the huge service sector has suffered particularly from the effect of lower oil prices seeping into the onshore economy.
This picture is reversed across the UK: the service sector is the main driver with construction weakening.
The authors of the report, which is sponsored by PwC, say domestic demand continues to be boosted by low inflation, net immigration, low interest rates, and some pick up in wages and earnings.
But they warn that actual and potential threats to this growth remain. Further austerity measures planned by the UK Government are a key factor as well as continuing high levels of household debt, which for some households paying a variable interest rate will become an increasing burden if rates rise in the near future.
Analysis in the latest commentary also causes the Institute to express concern about Scotland’s weak productivity and poor export performance, which it suggests could have long-term growth implications.
Brian Ashcroft (right), Emeritus Professor of Economics at the University of Strathclyde, said: “With growth slowing right across the UK and especially in Scotland, now is the time for the Chancellor to rethink his cuts to tax credits and for the Bank of England to continue to hold rates.
“Scotland’s weak productivity and poor export performance necessitates that the Scottish Government tackle these issues more directly if it is to raise the long-term growth rate of Scotland’s economy.”
Paul Brewer, PwC Government and Public Sector leader in Scotland, said:
“While it is encouraging to see Scottish Government’s ongoing focus on infrastructure investment and hard evidence of the positive impact this is having on our construction industry, unless this is sustained over a long period of time there is a risk we will become increasingly exposed to shortfalls in the service sector.
“Productivity is also key to future economic success and it’s vital that issues such as enhancing skills, particularly in relation to Scotland’s core and emerging sectors, and innovation are addressed if we are to see any meaningful and sustained uplift.
“We are also seeing the effects of the low oil price manifesting themselves across other onshore sectors from engineering to hospitality – this is no longer the preserve of the oil and gas industry. Indeed, our latest UK hotel report noted a double-digit fall in occupancy levels and revenue per room across Aberdeen in the year to July 2015.
“With oversupply in the oil market looking likely to continue in the medium-term, it’s crucial that the oil and gas industry swiftly adjusts to this ‘lower for longer’ scenario, working closely with the regulator and Government to protect the long term future of Aberdeen as a global hub.”
Economic forecasts and the wider commentary
Ongoing export difficulties, as a result of a relatively high pound sterling and lingering effects of the low oil price on Scottish onshore activity, has stilted growth in 2015.
This slowdown in recovery during the first half of the year has resulted in a significant downward revision in GDP growth to 1.9% – a 0.6% drop from the June forecast. The forecast for 2016 is 2.2% with 2017 expected to reach 2.5%.
Weakening export demand and the strength of sterling has also had an adverse impact on manufacturing growth, both in Scotland and the UK, with the current crisis in the UK steel industry a case in point.
And this could be exacerbated by existing and potential risks such as China’s structural reforms which will lead to slower growth and an increase in US interest rates will have global repercussions, which will serve to slow growth especially in emerging markets.
On a positive note, the Commentary does note the potential for a boost in external demand for goods and services following a gradual pick-up in growth across the Eurozone as problems in Greece are resolved, in the short term at least, and risks of deflation recede.
SRC on the Scottish Government’s retail sales index
The Scottish Government has today published its Retail Sales Index, which shows a second successive quarterly rise in retail sales values albeit at a weaker rate of growth that in the previous period. Over the year as a whole the value of retail sales grew by 1.2% in Scotland, and at 1.6% in the UK.
Commenting on the figures David Lonsdale, director of the Scottish Retail Consortium, said: “These figures point to a second successive quarterly growth in retail sales which is encouraging. However when one factors in shop prices which have fallen in each of the past 30 months it shows that retailers are having to work ever harder to maintain let alone grow sales values.
“The period leading up to Christmas is the most important trading period in the year for many retailers, and with shop price inflation at a record low and pay growth outstripping inflation consumers are set to benefit from some great deals.
‘The prospects for retailers are ultimately determined by the state of the economy and their own ability to adapt and seize on the opportunities that arise.
“With the clock ticking down towards big upcoming announcements on the UK and devolved budgets in a few weeks’ time retailers’ will be looking for convincing action from the Chancellor and Scotland’s Finance Secretary to improve consumer confidence, as well as steadfast resistance to stem the relentless rise in government-inspired cost pressures which have been witnessed of late or are under consideration.
“Rising costs divert and exhaust resources which otherwise would be used to grow the business.”