Jeremy Peat: 'Sadly this story of an innovative feast for the few and famine for the many rings true for Scotland'

On the one hand, the UK economy has performed significantly better in 2016 than was anticipated after the Brexit vote, while its global counterpart has also been on the up. Now no less than the International Monetary Fund has uprated its forecast for both global and UK growth in the current year – to 3.5% and 2% respectively. This 2% figure for the UK is around trend, similar to forecasts from the Bank of England and the Office for Budget Responsibility, and nigh on double the IMF’s forecast for the UK from 6 months back. This combination of global and UK strength suggests that everything in the garden is rosy – with strong prospects for the UK and Scottish traded sectors.

But nothing can be so straightforward in this modern economic world. So, on the other hand, there are clear signs of deceleration for the UK consumer, with further tough times ahead. Retail sales volumes were sharply down in March, both month on month and quarter on quarter. This is the first time for 4 years that we have seen a quarterly fall; and may well reflect the challenging combination of retail prices rising faster than for many a moon (prices in the shops up 3.3% year on year) and household real incomes declining in real terms, as price rises outstrip average pay hikes.

Looking ahead, this combination looks set to prevail. Households face the choice of one or more from (i) reducing savings, (ii) increasing borrowing or (iii) further reductions in spending. The last option seems most likely given that consumer credit growth has been too strong for too long, the housing market is less buoyant than in 2016 and there is a clear risk of an interest rate hike or two in the pipeline. The consumer side of our economy – making up two-thirds of the total - faces a bleak 2017. No surprise then that forecasts for UK growth in 2018 are now lower than for the current year, as consumers tighten their belts and some Brexit factors potentially materialise.

No surprise either that the first estimate of UK GDP growth in the first quarter of 2018 suggests a fall to 0.3%, less than half the rate estimated for Q4 2016. This slowdown is essentially due to consumer related segments of the economy, with manufacturing actually increasing, thanks to sterling weakness enhancing UK producers’ competitiveness. Recall that while the UK grew at 0.7% in Q4 last year Scottish GDP declined. These data for the last quarter do not bode well for Scottish GDP in Q1. The risk of formal recession has increased.

To conclude let me return to that old hobby horse of mine, productivity, and some very interesting pointers from a very impressive speech a wee while back by Andrew Haldane, Bank of England Chief Economist, at LSE. Haldane set out the disappointing productivity performance in recent years, and picked up his own dichotomy - ‘the co-existence of secular innovation (among leaders) and stagnation (among laggards).’ We know that productivity performance is ultra-weak, but the overall figure masks two diverse trends. There has been a period of startling change and productive innovation in some sectors – due to ‘the rise of robotics, artificial intelligence, Big Data, the Internet of Things and the like’ –alongside limited investment and negligible innovation from the great majority of companies.

Sadly this story of an innovative feast for the few and famine for the many rings true for Scotland. Scottish trends probably match those at the UK level, where a mere 1% of firms have seen productivity growth at some 6% per annum; while for one third of companies there has been zero growth in productivity since the turn of the century.

Many countries across the world have shared our disappointing productivity performance since the 2008 recession. However, the UK exhibits this characteristic of a ‘long and lengthening tail of low-productivity companies’ far more than our key competitors.

Earnings growth in this long tail of companies must be slow or negligible. Employment has held up, thanks in part to low investment and innovation (and limited corporate failures in our low interest rate environment). But this positive employment trend has been at the cost of earnings stagnation and often limited indeed job progression.

Separate data released in mid-April shows that the average working week for employees in Scotland has fallen back sharply since 2008, both absolutely and relatively to other UK nations and regions. This presumably implies a greater degree of switching in Scotland from full time to part time employment, often not by choice but because of a limited availability of full time options. A transition to an environment with more companies investing and innovating should result in enhanced quality employment opportunities and stronger earnings growth, driven by more widespread productivity growth.

A successful Scottish economy needs widespread productivity growth. Andrew Haldane has some suggestions for driving beneficial change. Working to improve corporate management features high on his list. High quality management is correlated with higher productivity. Here is a task for Scottish Enterprise, for the CBI, IoD, FSB, etc. How can the lessons of good management practice be better dispersed throughout Scottish businesses, to the ultimate benefit of the overall economy?

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