Strathclyde Business School Newsletter
November 2014

Fraser of Allander Economic Commentary: Economic recovery - turning point or knife edge

The Scottish Economy delivered strong economic growth in the first half of 2014, in the run-up to the referendum - but there are signs growth may be beginning to slow, according to the latest economic commentary from Strathclyde Business School's Fraser of Allander Institute, sponsored by PwC.

Slowing demand, falling real wages, rising levels of household debt, weak international trade - and the prospect of further substantial fiscal austerity to come - raise the question of whether the Scottish economy is poised for a period of slower but sustainable growth, or whether this slow-down in growth will lead to recession.

The authors say the economy may be at a turning point - but warn it may also be on a knife-edge.

Brian Ashcroft, Emeritus Professor of Economics at Strathclyde, said, "The Scottish economy powered ahead in the first half of 2014 with GDP growing strongly, rapid job creation and falling unemployment. But with signs of a slowdown appearing both at home and abroad, we fear that the recovery may soon be running on empty unless there is a new boost to demand.

"With little or no growth in real wages, rising household debt and house price growth moderating, the drivers of consumer demand are weakening. Private investment is picking up but is still below its previous pre-recession peak. UK interest rates are low and in view of pressing infrastructure needs, now is the time for the Chancellor to step up to the plate and invest more in Scotland.

"The IMF recently called for Governments to undertake more public infrastructure investment through increased borrowing, which can stimulate present and future growth without increasing countries' public debt burden. It is time for the Chancellor to follow that lead."

In the first Economic Commentary after the referendum, the Fraser of Allander Institute forecast for GDP growth is 2.7%, up from its 2.5% forecast in June. For 2015, it has kept its forecast at 2.2% in 2015, but has revised its forecast for 2016 down to 2.1%, from 2.4%.

The rise in the forecast for 2014 is due to the strong growth in the first half of the year. The forecast for 2016 has been revised down because of concerns about a persistent weakness of overall demand in the economy.

Paul Brewer, PwC's Scottish government and Public Sector Leader, said Scotland's economic recovery was at a crossroads and, despite the UK austerity programme, there was further opportunity to stimulate growth.

He said, "There is no one-size-fits-all economic policy answer to overcoming the slowdown in growth impacting Scotland and the rest of the UK. We need policies and powers to address territorial problems and opportunities and identifying those is one of the challenges facing the Smith Commission - for example, increased freedom to borrow.

"As we approach the Autumn Statement, there is scope for the Chancellor to offer the Scottish Government and local authorities more flexibility to invest in strategic infrastructure programmes aimed at improving digital and transport connectivity, skills, productivity and the competitiveness of Scotland as a business location.

"As we move forward post-referendum to create a Scotland that is confident, competitive and bold, government in Westminster and Holyrood must look to the real benefits that further decentralisation can bring to Scotland and indeed to the other nations and regions of the UK."

The Commentary also includes several articles on a range of economic and policy issues, including:

  • The Scottish NHS: meeting the affordability challenge
  • Policy challenges of the 'post-crash' labour market
  • Reflections on the Scottish independence referendum