FAI Report: Scotland’s economy continues to recover – but uncertainty over Brexit and Indyref2 will act as brake on growth

FAI - Recovery in the Scottish economy is forecast to continue this year but will remain weak with little hope of a sharp increase in growth, according to a new report published today by Scotland’s leading independent economic research institute.  To read the full report please click here.

The commentary, provided quarterly by the University of Strathclyde’s Fraser of Allander Institute, suggests growth in Scotland is forecast to remain fragile over the next few years as the downturn in the North Sea continues to bite and weak levels of consumer confidence put a curb on spending. The report finds:

  • The Institute’s new central forecasts are for economic growth of 1.2% in 2017, 1.3% in 2018 and 1.4% in 2019 – broadly unchanged since December’s forecasts.
  • The downturn in the North Sea – alongside lower levels of overall confidence in the economy – suggest that the Scottish economy will continue to lag behind the UK as a whole.
  • Over the 10 years since the start of the financial crisis, the Scottish economy has grown by an average of just 0.7% each year – less than a third of its long-term trend. It is no surprise therefore, that whilst unemployment rates remain close to record lows, the incomes of most households continue to be squeezed.
  • Getting the economy moving again must be a key priority for policymakers from all political parties.

Strathclyde’s academics believe unprecedented levels of policy uncertainty will act as their own headwind on growth.  Yet, with so little clarity over the end outcomes, many businesses appear to be ‘looking through the uncertainty’ and continue to press ahead with day-to-day activities. Indeed, a number of recent business surveys point to a modest pick-up in activity toward the end of 2016 and into 2017.

The Scottish labour market continues to hold up relatively well the report finds. Employment is close to its record high whilst the current unemployment rate of 4.7% is well below its long-run average. However, with rising inactivity, weak earnings growth and reduced hours worked, the squeeze on households remains challenging.

The prospects of a second independence referendum are likely to dominate debate for the foreseeable future. Whilst the key issues are clear, the arguments this time are likely to be different. For example:

  • Firstly, in 2014 there was a clear choice between a stable ‘status quo’ – albeit with more devolved powers – and independence. With Brexit and Indyref2, the debate will be set against the backdrop of two types of inevitable economic change.
  • Secondly, it is undoubtedly the case that the recent performance of North Sea oil and gas poses a challenge to any transition to independence. For example, the sharp fall in oil prices has all but eliminated North Sea tax revenues.
  • Thirdly, many of those on the ‘yes’ side in 2014 argued that there would be a degree of continuity between the then status quo and independence; e.g. plans to keep sterling, joint regulation of banks and for both to be members of the EU. This time, the Scottish Government appear open to more radical ideas on issues such as currency, financial regulation and fiscal policy.

Source: Fraser of Allander Institute

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