As the Scottish and UK economic recoveries gather pace, the risks of a reverse have widened and increased according to the latest Economic Commentary from the Fraser of Allander Institute, sponsored by PwC.
The Scottish economy is now enjoying a strong recovery, with employment and productivity up and strong growth forecast in production and manufacturing. The surge in jobs and output is, however, subject to real risks of:
Brian Ashcroft, Emeritus Professor of Economics at the University of Strathclyde Business School, said, "The Grangemouth dispute which shut down the refinery plant last October lowered Scottish GDP growth in the final quarter of last year and masked the strength of the recovery, while the recovery in the Scottish and UK labour markets is almost unprecedented.
"However, we are concerned that the risks to the recovery have widened and deepened. Household spending is too reliant on further borrowing as real wages have fallen, net exports continue to contribute little to growth and business investment is only just beginning to pick up.
"But it is the boom in the London housing market that causes us most concern. We believe the Bank of England must avoid raising interest rates on that account. With Scottish house prices hardly rising at all, it is inappropriate for the recovery to be dampened across the UK for what is clearly a local or regional issue centred on London."
In the final Economic Commentary before the independence referendum, the Fraser of Allander Institute forecast for GDP growth is 2.5% for 2014, up from its March forecast of 2.3%. For 2015, it has revised the forecast down marginally to 2.2% (2.3% - March commentary).
The rise in the 2014 forecast is a result of the generally better than expected improvement in performance, optimism in business surveys and an improved outlook, especially for investment. However, the business surveys also contain doubts about the sustainability of the recovery. This reflects the risks examined in detail within the report and is the reason for the 2015 forecast being lower than in March.
The Institute's 2016 GDP forecast of growth of 2.4% reflects a reasonably optimistic view that the risks will be overcome; but if they are not, growth could be as low as 1% in 2016.
Paul Brewer, Partner at PwC in Edinburgh, said, "There's a consistent trend of improving business optimism as the recovery takes hold but it's yet to feed through into the investment that will help balance the recovery.
"We don't see access to finance as a major constraint on investment, certainly for larger companies, so other factors such as the time for investment decisions to be fulfilled and pre-Referendum uncertainty will be in play, and we would look for significant step up in investment through the rest of 2014."
One bright spot for the Scottish economy is the evidence that real Scottish wage growth appears to have become positive in 2013 whilst UK real wage growth has remained negative for the past three years.
Professor Ashcroft added, "This may be due to a faster growth in labour productivity in Scotland. If so, the prospects for Scottish household spending might be a little rosier than in the UK."
The Economic Commentary also finds:
As Scotland's leading publication on the Scottish economy, the Commentary also publishes articles of topical interest to the Scottish economy and more widely. This issue includes articles on:
The Commentary's analysis – and call to the Bank of England – was picked up by the Financial Times, Times, Herald, Scotsman, P&J and several other titles. Plus Emeritus Professor Brian Ashcroft, the Commentary's Economic Editor appeared on camera on BBC Scotland’s Reporting Scotland and Scotland 2014 and the STV News.