Our latest Economic Commentary, which was published today can be accessed here.
A summary of our findings and forecasts is provide below:
- The Scottish and UK economies are now recovering at a reasonable rate from the greatest economic shock since the 1930s. This recovery, slowed by the UK Coalition Government’s austerity programme, has taken longer than from the 1930s Depression or any of the three other recessions experienced since the 1970s.
- But while growth is continuing, the pace of growth seemed to have slowed a little towards the end of 2014.
- The jobs market and unemployment have recovered more strongly than output, resulting in falling labour productivity and hence little improvement in real wages and real household incomes.
- Unemployment now stands at 5.4% in Scotland and 5.7% in UK.
- Despite the better headline unemployment figures in Scotland, there is still more ‘slack’ in the Scottish labour market than in the UK and so despite jobs growth there is little upward pressure on wages.
We ask: will the recovery continue? We identify several positive and negative influences that will impact on the pace of the recovery. We examine them under four headings: growth in markets; oil prices, inflation and deflation; UK fiscal and monetary policy; and Greece and the Eurozone.
Growth in markets
The key points here are:
- Despite the steady growth in world trade the latest IMF and OECD forecasts suggest a slowing in key countries and Scotland’s key export markets.
- The composition of Scottish and UK growth also continues to be unbalanced with household spending driving growth, and fixed investment making a variable contribution.
- As we have stressed in recent Commentaries, household spending is being fuelled by rising debt, which is almost certainly unsustainable.
- If the economy is to rely on continued growth in household spending it requires a sustained rise in the real wages and incomes of households. However, this is unlikely to occur unless labour productivity improves, which has been badly hit as a consequence of the Great recession.
Oil prices, inflation and deflation
- Inflation is falling right across the global economy. There is a clearly a risk of deflation – a sustained falling price level, leading to expectations of further price falls, postponed spending and reduced spending as the real value of household and corporate debt rises.
- However, while the risk is there for the UK and the US, at this stage it is more apparent than real. Core inflation is around 1.6% in the US and close to 2% in the UK.
- The fall in oil prices has been large, around 50% at the time of writing, and the potential for a sizable boost to spending is significant with some respected analysts forecasting a 0.5% boost to UK GDP in 2015.
- I’ll discuss our estimates of the impact of this fall after Grant has spoken about some of the related issues
UK fiscal and monetary policy
- The base rate set by the Bank of England’s Monetary Policy Committee (MPC) is likely to remain at 0.5% for the remainder of this year. So monetary policy should remain accommodating to growth for the foreseeable future.
- The same cannot be said for fiscal policy in the UK.
- The UK Coalition plans a further £92 billion of fiscal tightening by 2019 if they win the election - more than £200bn in total or a direct reduction in GDP of 13%.
- We estimate, that if the economy is to grow at around 2.5% per annum then the underlying growth rate in the face of such anticipated fiscal consolidation – which might change after the UK General Election in May - would need to be about 4% per annum: a big challenge for the private sector.
Greece and the Eurozone
- The new Greek Government led by the Syriza party came to power with a mandate to renegotiate the terms of the 2012 bailout, which most analysts agree is imposing a severe burden on the Greek economy and society.
- GDP has fallen by 25% since 2007 and unemployment is currently over 25%, with youth unemployment 50%! No other democratic country has endured austerity of such size and pace.
- If by June 2015 there is not agreement on a reduction in the pace of austerity, then there is a real risk of ‘Grexit’, that is a Greek exit from the Eurozone.
- This would have significant economic and political consequences for the Eurozone itself and for the global economy, including the Scottish economy.
- When the threat of Grexit was last posed in 2012, the Fraser of Allander Institute undertook a modelling exercise which estimated that a Greek exit would lower Scottish GDP by -1.2% and reduce employment by 49,000 and this is before estimating the potentially greater impact of a wider contagion of bank runs and possible further withdrawals of other peripheral countries from the Eurozone.
- Notwithstanding the developments above, we are forecasting growth of 2.8% in 2014, 2.6% in 2015, and 2.4% in 2016, an upward revision to our November 2014 forecasts. These reflect our view that household spending and investment are stronger than we projected in November.
- We have also raised our forecasts for employee job creation compared to our November forecasts. On the central forecast, we are now forecasting that net jobs will increase by 53,850 in 2014, 51,350 in 2015 and 57,600 in 2016. Our unemployment forecasts have been revised down further again from November, reflecting higher economic activity.
- Our projection for unemployment on the ILO measure at the end of 2015 is 136,600 (5.0%), falling further to 125,250 (4.6%) by the end of 2016.