Bill Jamieson: Hopes for green shoots, but don’t forget the frozen roots
It will be a recovery of sorts – most premises in Scotland’s high streets will remain shuttered for weeks. But at least here’s a start, and as the months pass, we can expect a gathering improvement in economic activity and output as the permafrost of the Covid-19 plague and lockdown begins to lift.
But as the freeze slowly thaws, what underlying state of the economy will we find? Far from warm fertile soil and the start of green shoots underneath, we find – another layer of frost.
The condition we were in before Covid-19 struck – “status quo ante” – was far from buoyant. Comforting though it may be for the government to attribute all our economic troubles to the pandemic, there are deeper and longer-lasting problems underneath which will prove a major challenge to address – even assuming we have the policy tools to hand.
I am grateful to economist Professor John McLaren for research he has undertaken on Scotland’s economic performance in absolute and relative (to the rest of the UK) terms over the past 20 years – that is, since devolution.
Findings are more than usually hedged with caveats and qualifications – accurate figures on numbers employed in some sectors prominent among them. But the numbers cannot be dismissed as short-term blips or statistical outliers.
Among his key points are:
Over the full-time period – 1998 to 2019 – the latest data shows that Scottish growth slowed noticeably post the 2008-09 recession and that, even after adjusting for population change, Scotland has grown slower than the UK. Furthermore, this slower relative growth has worsened post-2008;
The fastest growth sectors of the Scottish economy were information & communications and business services. But these were also the sectors where the biggest, negative, growth gaps existed between Scotland and the UK. In the case of business services, this gap has largely emerged since 2014.
The main areas where Scotland outgrew the UK were manufacturing and financial services. But in real terms, and adjusted for population change, there is one sector where the raw underlying figures might merit further scrutiny. Hospitality sector accommodation and catering recorded no growth in output over the past two decades. In contrast, at the UK level, the sector grew by around 35 per cent.
The health and social work sector in Scotland has consistently grown more slowly than is seen for the UK, leading to an increase in output (for example, the number of operations) of less than half the 60 per cent experienced at the UK level.
“In the past,” Professor McLaren comments, “ such underperformance idiosyncrasies may have seemed academic to many people. However, now that the Scottish Budget is highly dependent on the Scottish growth rate, via income tax, then such failures have tangible consequences.
“So, for example, it becomes much more pressing to understand why business services have stopped growing in the past five years in Scotland, but continue to surge ahead at the UK level.”
The downturn in North Sea related activity is likely to have brought about some of the recent underperformance in private sector services. “If so,” McLaren adds, “then this is both an economic and fiscal worry as the North Sea again enters a period of lower activity due to the collapse in the oil price.”
Even before Covid-19 struck, growing pressures from an ageing population meant that annual rises in health and social work capacity were vital. But output here has not grown for seven years in Scotland and over the past 20 years has been consistently lower than seen for the UK.
The research, he finds, “shows some relative success stories for Scotland but even more areas that are of concern, especially relating to the recent past. The lack of any real growth over the past five years in key areas of economic and social importance, like business services and health, should be a worry to politicians and citizens alike.”
I suspect that over the autumn and winter months, many conferences, seminars and papers will seek to arrive at an assessment of the economic carnage wrought by the pandemic and to explore routes forward.
But our problems are not just about Covid-19. The initial conclusions of John McLaren’s outstanding findings lead to very searching questions about the underlying health of Scotland’s economy and performance. And on this, far from an underlying upturn, we are still at base camp.
Negative rates – terra incognito looming but still unlikely
Of all the freakish consequences of the Covid-19 pandemic, the resort to negative interest rates must rate among the most extreme. Will we really have to pay for the “privilege” of a bank deposit account or fixed interest saving?
As if 0.1 per cent was not enough, the Bank of England’s Monetary Policy Committee is said to be warming to the idea. Five of the MPC’s nine members, including Bank of England Governor Andrew Bailey, have recently discussed the option of cutting bank rate from the current 0.1 per cent to below zero. Denmark’s central bank lowered rates below zero in 2012, and several others have followed, including the European Central Bank and the Bank of Japan.
However, while taking rates below zero could lower banks’ funding costs and encourage lending, the “net economic effect”, says Oxford Economics, “is ambiguous. Also, ‘sticky’ deposit rates would hit banks’ already strained profitability, risking paradoxical effects.”
It suggests better-targeted tools are available to it. Increasing the generosity of the Term Funding Scheme could deliver the benefits of negative rates while reducing adverse effects. And the present scale of fiscal support reduces the need for looser monetary policy.
So, tempting though it may be to take the plunge into terra incognito and usher in the most radical experiment yet in monetary policy, the MPC is likely to hold fire at its monthly meeting this week.
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