Growth slows as Scotland’s performance diverges from UK

While domestic demand is clearly driving growth across Scotland and the UK, the commentary reveals a divergence in the underlying factors.

Construction provides the main impetus in Scotland, with public spending on infrastructure underpinning growth. Conversely, the service sector has been weakened by the onshore impacts of lower for longer oil prices, hitting business services in particular, as well as mining and quarrying. This picture is reversed in the UK: the service sector is the main driver with construction weakening.

According to the Commentary authors, domestic demand continues to be boosted by low inflation, net immigration into the UK, low interest rates, and some pick up in wages and earnings.

But actual and potential threats to this growth remain. Further austerity measures planned by the UK Government is 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, 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.”

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 per cent - a 0.6 per cent drop from the June forecast. The forecast for 2016 is 2.2 per cent with 2017 expected to reach 2.5 per cent.

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.