JEREMY PEAT

To be frank, and to repeat what I have said more than once before in this column, economic forecasting is always something of a mug’s game; more art than precise science. That is not primarily because forecasters lack ability or decent models, but because there are always a whole host of internal and external uncertainties which can push a forecast off course. Those ‘known and unknown unknowns’ mean that any forecast at any time for any economy is subject to major uncertainties.

This point about uncertainties now applies to the UK – but ‘in spades’ as the bridge player would say. Goodness knows what happens next. It is becoming clearer and clearer that the uncertainties regarding Brexit are massive and increasing rather than declining. We do not even know what type of relationships our blessed UK Government would like to achieve, let alone what outcome is most likely. Nobody could place reliable odds on even a range of potential outcomes.

Even when we know the likely outcome, the impact on numerous elements of our economy will be uncertain. No wonder businesses are increasingly unwilling to invest.

Given this state of play it is easier to talk about the past (albeit recent economic history is also subject to uncertainty as data are traditionally revised over the next couple of years) than the present let alone the future. The data tell us that UK economic growth has slowed significantly in the first half of 2017. Growth in the first quarter was a miserly 0.2%. In the second quarter this rate edged up to a still miniscule 0.3%. Manufacturing and construction declined, while the service sector grew thanks to strength in retail sales and film production. It appears that we can thank Wonder Woman and the latest Pirates of the Caribbean film for such growth as remained. (NB these are not pseudonyms for our Prime Minister and her Brexit negotiating Ministers.)

UK growth over the past 6 months was at its slowest since 2013, while growth on the continent of Europe and many emerging markets has been accelerating. Even that growth in retail activities is at risk, as wage growth remains sluggish and outpaced by inflation. ‘Real’ wages – i.e. after allowing for inflation – are in decline. Slow growth in wages is set to continue as employers remain reluctant to pay more, given the Brexit uncertainties, and inflation remains robust as sterling stays weak.

This implies slower growth through the rest of 2017 and into 2018. Two recent forecasts are in line with this view. The EY Item Club revised down their forecast for 2017 as a whole to 1.5%, with the forecast for 2018 even lower at 1.3%. Meantime the Bank of England has reduced its forecasts for this year and next. For 2017 the Bank’s forecast of GDP growth is down to 1.7% and for 2018 a mite lower at 1.6%. As Governor Mark Carney emphasised ‘uncertainties about the eventual [post Brexit] relationship are weighing on the decisions of some businesses’, while investment has been way weaker than would have been anticipated ‘in a very strong world’.

This actual and anticipated weakening of the UK economy probably makes any early action to raise interest rates less likely. Last week the Monetary Policy Committee voted 6-2 against any change. Some members may struggle to stay relaxed as inflation bubbles upwards. But, they should be taking a view about likely inflation over the medium term, and as consumption growth eases inflation should tend to return towards acceptable levels. The risk of any marked increase, beyond (say) 3%, looks minimal. Lack of upward movement on interest rates because the economy is too weak to cope is not, however, exactly the height of good news!

In this context the latest estimates for Scottish GDP stand out as truly remarkable. Scottish output contracted in the final quarter of 2016 and for many the risk in Q1 2017 was for another decline and a dip into formal recession. On the contrary data released in early July suggest GDP growth in Q1 of 0.8% - to be compared with UK growth of one quarter of that rate. Services grew at a sedate 0.3%, construction declined sharply but ‘production’ shot up at over 3% in that one quarter. Manufacturing growth alone was estimated at 4%!

These data require caution and a commentary. They will inevitably be subject to revision. Some elements stick out like the proverbial sore thumb. Also data for this one quarter cannot mask Scotland’s relative under-performance as compared to the UK. Taking the last two years for which we have data as a whole, Scottish GDP growth at 1.2% has been around one third of the UK rate. Manufacturing may have risen 4% in that one quarter but is down by 6% over those two years.

I see no suggestion of a more positive outlook for Scotland. We have no Bank of England forecasts, but the EY Item Club suggests growth in 2017 of 0.9% (comparable to 1.5% forecast for the UK) and the Fraser Institute 1.2%. In sum the Q1 data are likely to be (at best) a blip and the Scottish outlook is for growth around 1% this year and next – with real incomes falling.

Is there light at the end of the Brexit tunnel? Goodness knows. Apparently those who voted for the UK’s departure from the EU are willing to accept some losses on the economic front. We can only hope these do not last for too long or prove too severe. I remain a pessimist.

Jeremy Peat is visiting professor at the University of Strathclyde International Public Policy Institute