The substantial and sustained fall in the price of oil could boost the recovery in Scotland despite the harmful impact on the oil and gas sector both offshore and onshore, according to the latest Economic Commentary from Strathclyde Business School's Fraser of Allander Institute, which is sponsored by PwC.
The Scottish and UK economies are now recovering at a reasonable rate from the greatest economic shock since the 1930s. Recovery picked up in 2013 as the pace of austerity slowed after the UK posted the slowest recovery from the global recession of any advanced country, with the exception of Italy and Greece. The recovery has taken hold as consumers raise their spending and as investment picks up and there may be a further boost to growth from lower oil prices if they continue at the present low levels.
However, the Institute notes that there are many risks to a durable recovery: growth is unbalanced raising the risk that the recovery might falter; further planned austerity will, if implemented, act to slow growth unless the private sector grows more quickly to compensate, and the continuing problems in the Eurozone, with the risks of deflation and a Greek exit (Grexit), could potentially damage the Scottish economy.
Brian Ashcroft, Emeritus Professor of Economics, University of Strathclyde, said, "The falling oil price and recovering investment could provide a welcome boost to the recovery just as there are signs of some slowing in the rate of growth in most major economies except the US, and as the troubles in the Eurozone worsen with the increased risk of deflation and a distinct threat of Greece exiting the Euro.
"The absence of good data and uncertainty about future oil prices allow only a crude estimate of the impact on the Scottish economy of the fall in oil prices. Nevertheless, we estimate that the impact on employment this year could range from 9,700 net additional jobs to a net job loss of 600 on best and worst case scenarios."
He added, "While the boost from low oil prices to real disposable incomes and reduced production costs is to be welcomed, we must not forget the oil and gas industry, which is major asset to the Scottish economy."
In the latest Economic Commentary, the Fraser of Allander Institute forecast for GDP growth is 2.8% in 2014, 2.6% in 2015, and 2.4% in 2016; an upward revision to their November 2014 forecasts. These reflect the evidence of a strengthening of the recovery in investment in particular.
David Glen, head of tax, PwC in Scotland, said, "The Scottish economy continues to show healthy, sustained growth with sectors such as manufacturing and production, construction and business services helping drive this momentum.
"While the latest forecast should boost business confidence in the short to medium term, the challenge will be keeping this recovery on track.
"As a result of the volatile, low oil prices, we believe there is a real danger of an economic triple whammy across the oil and gas industry: reductions in income may result in incremental investment becoming uneconomic, potentially diminishing field life and accelerating decommissioning.
"With the 2015 UK budget on the horizon, there is real scope for the Chancellor to reform what is currently a highly complex tax regime: protecting existing production; incentivising future exploration; safeguarding skills in the North Sea and across the UK supply chain; and preventing what could be an irreversible decline in the oil and gas industry.
"Other industries, such as automotive in the 80s and 90s, prove that there can be opportunities in adversity - but it needs more than innovation, collaboration and bold business strategies. Fiscal levers are also a vital part of the jigsaw and the oil and gas industry will be looking to the Government to deliver on 18 March."
To coincide with the Commentary's 40th anniversary, this edition also includes the first of a three-part series by Alf Young, Visiting Professor at the International Public Policy Institute (IPPI) at the University of Strathclyde on the transformation of the Scottish economy over the past 40 years; his first article covers the period 1975-1990.
Other articles include: