The Scottish & UK economies, post-election

Professor Brian Ashcroft

Economics EditorFraser Economic Commentary in partnership with

Outline

1. The ‘Fraser’ / Fraser Economic Commentary

2. Impact of the ‘Great Recession’

3. FAI’s forecasting accuracy

4. Pressing economic issues for new UK Government and UK and Scottish economic growth:• The productivity challenge• Further fiscal consolidation and prospect of tax rises• Growth of private v. public debt• Eurozone traumas• Impact of UK constitutional change

1. Fraser Economic Commentary• First published in 1975; 2015 is FAI 40th anniversary.

• Sponsored by Price Waterhouse Coopers (PwC) since 2008 and by Strathclyde Business School.

• Published 3 times p.a. and draws on FAI expertise in modelling regional economies, regional development and energy economics.

• A 3-year, medium-term, model-based forecast is a key feature of each Commentary

• Commentary key vehicle for high-quality articles by academics and others on contemporary Scottish economic issues.

• Commentary Archive being digitized and available online

2. Impact of the Great Recession- shallower recession and weaker recovery in Scotland

Impact of the Great Recession- milder jobs recession and faster jobs recovery creates productivity problem, more so in UK than Scotland

Impact of the Great Recession - high growth of part-time and self employment with limited FT jobs recovery means demand for labour weaker than jobs recovery might suggest, especially in Scotland

Impact of the Great Recession - still plenty of ‘slack’ in Scottish labour market

3. FAI Forecast Accuracy - Reasonable forecast accuracy but difficulty predicting ‘turning points’ e.g. the Great Recession in 2009

FAI Forecast Accuracy - Another way of presenting the absolute error (in percentage points) between forecasts made at different forecast horizons shows how clearly 2009 forecast accuracy differed from other years

4. Pressing economic issues forthe new UK Government (1)

The Scottish and UK recoveries are not secure. There is no guarantee recovery will sustain due to 3 key challenges:

• The productivity challenge• Further fiscal consolidation and prospect of tax rises• Unbalanced economy and worrying growth of private debt

… plus• Eurozone traumas and risks of Greek defaults/Euro exit• Risk of political instability around constitutional change in

UK

Pressing economic issues for thenew UK Government (2) Productivity

• Martin Wolf in FT notes that the good UK employment performance in the recovery is the mirror image of the collapse in growth of output per worker and output per hour:

• in November 2014, output per hour in the economy was 1.7 per cent lower than it had been in February 2008

• He notes further that “ …. such a long period of stagnation appears unprecedented at least since the 19th century.”

• Weak productivity growth means low real wage growth and less household spending; higher unit costs and reduced competitiveness

Pressing economic issues for thenew UK Government (3) Further austerity or ‘fiscal consolidation’

IFS Analysis• By 2014 £110bn of fiscal tightening measures implemented

– 82% from spending cuts and 18% from net tax rises • £92bn of further fiscal tightening planned by Coalition

– so on this measure 55% done 45% to do• Overall the Coalition plan from 2010–11 to 2019–20 comprises 89% spending

cuts and 11% net tax rises• Significant welfare cuts planned, but also likely that tax increases may be greater

than planned.• These planned further reductions in spending and tax rises will be a major drag

on economic recovery

Pressing economic issues forthe new UK Government (4) Unbalanced economy

• Future growth predicted to depend mainly on household spending

• But underlying determinants of that spending are weak e.g. little real wage growth

• Forecast relies on rising household debt to 172% of household income.

• This should be compared with pre-crisis household debt of 168% of household income!

Conclusions• UK and Scottish economies are exhibiting a slow recovery from

recession: initially slowed by fiscal austerity, which was relaxed in 2012 -13.

• The Scottish recession was shallower and recovery weaker than in UK as a whole.

• The jobs recovery was much stronger.• The imbalance in the jobs and output recoveries is seen in

productivity growing little since the start of recession.• The productivity challenge, further planned fiscal austerity and

an unbalanced recovery – especially rising private debt - are seen as biggest threats to a sustainable recovery.

• Problems in the Eurozone and Greece plus risks of constitutional instability in UK may also hamper recovery

Conclusions

• Our judgment is that despite the risks we should continue to see positive Scottish GDP growth over the next few years: 2.6% in 2015 and 2.4% in 2016.

• Net job creation in Scotland is expected to continue at around 50k in each year.

• Unemployment is predicted to fall further: to 5% by end 2015 and 4.6% by end 2016

• But as you saw earlier in this presentation forecasting is by no means an exact science!