Recession avoided, but growth is anaemic

Innis & Gunn's Dougal Gunn Sharp is adapting his business by sponsoring events

• Scotland saw economic growth in the third quarter of this year, but it was weakening as prices and the cost of borrowing hit consumer and business confidence.

• The government's chief economist looks to international demand as one factor that could help, but new figures show exports to the EU fell following Brexit, and global trade expectations are also weak.

Innis & Gunn has weathered some chilly economic weather in the two decades since it started brewing premium lager in Edinburgh.

The bank crash was a signal to keep away from too much debt, so higher interest rates in the past two years have not hit it as hard as some others.

But rising costs for households have meant subdued demand for nights out in its taprooms.

"Consumers are nervous. They're cutting back on things they used to do, like going out twice a week," says Dougal Gunn Sharp, noting there has been a consequent rise in off-trade demand for having one of his beers at home.

That uncertainty has added to his caution about opening more pubs. They are capital intensive, he says, and the prospect of borrowing to expand does not look that attractive.

The business, with its brewing now in Perthshire, is instead focussing on its core business, and looking to events to drive growth.

It already has a division seeking out such opportunities, having signed up as beer sponsor and provider of bars at the Royal Highland Show, the Royal Edinburgh Military Tattoo and concerts on Edinburgh Castle esplanade.

Stronger winds

That focus on sticking to the core business, while avoiding the cost and risk of investment to expand, is a repeating feature of business in Scotland.

It is reflected in business surveys, in data published by the Scottish government and analysis by its chief economist.

Wednesday brought statistics that show Scotland has avoided recession this year, but growth remains weak. Stronger wind speeds and fewer strikes helped shape a mixed set of output figures.

The third quarter of the year saw growth of 0.4% in Scotland. The Scottish government data also shows the most recent month, September, saw slowing growth, to only 0.1%.

For economists, a recession would have required two consecutive quarters of contraction. April, May and June provided one such fall in output, by 0.3%. The third quarter helped reverse that.

But looking back further shows that 0.4% was the only growth we saw in 12 months.

Looking ahead, with prices still rising and borrowing costs remaining higher for longer, the forecasts continue to appear positive but poor for the Scottish and the wider UK economies.

Figures show the businesses in the hospitality sector have struggled this quarter

Growth in September was at only 0.1%, following 0.3% for July and 0.2% for August. The services sector slowed as autumn began, while wind speeds picked up, raising output of wind turbines by 17%.

That has a growing influence on total output from the economy, also known as Gross Domestic Product.

The UK economic numbers this year have been affected by strikes, mainly in England. The third quarter saw the health service cut back on activity due to stoppages by staff, helping to explain why the UK as a whole saw zero growth and Scotland saw 0.4%.

Manufacturing was growing in Scotland, though it has not recovered to pre-pandemic levels. Construction has risen 2.5% in a year, but barely in the most recent quarter.

The services sector - more than three quarters of the economy - included relatively strong performance by the business services and finance sector, which represents 30% of Scotland's economy.

The quarterly figures once again showed hotels and catering having a tougher time than others.

Those are the figures that reflect on the past year. The pattern worth noting from a longer perspective is that the rebound from pandemic and lockdown has stalled. Output has barely changed from the peak reached in 2019, ahead of Covid's arrival.

With his review of the economy this week, the Scottish government's chief economist, Gary Gillespie, gave a tease that the resilience evident in the economy, despite all the pressures on it, might yet give us a pleasant surprise.

But most of his analysis was more downbeat, covering weak business investment, a negative consumer sentiment index, sustained price inflation fuelled partly by wage inflation, and higher borrowing costs.

Dr Gillespie also noted how varied the recovery from the pandemic has been for different sectors: construction up nearly 13% - after a 50% lockdown dip - services up 2.6%, and production, including manufacturing, down by nearly 6%.

And he notes that forecasts for growth are not good. Having been much too gloomy about prospects for this year, the Bank of England reckons on UK growth falling from 0.4% this year to zero next year.

In Scotland, the Fraser of Allander Institute (FAI) sees growth picking up to 0.7% next year.

'Pretty anaemic'

The EY ITEM Club of economists, using the Treasury model of the economy, is looking to growth of 0.2% for the whole of this year rising to 0.3% next year.

FAI director Prof Mairi Spowage responded to the latest GDP figures, with growth over three months, saying: "Given that we've seen growth starting to slow down, we've still got a pretty difficult period ahead with higher prices, higher interest rates than people are used to, and wider uncertainty in the economy.

"All the forecasts for Scotland are pretty anaemic."

Scotland's chief economist concluded that the best prospects from growth may be from exports, and may be sluggish.

Dr Gillespie added: "While the return to positive real earnings growth is good news for household incomes, the ongoing weakness in consumer sentiment and lower demand for labour mean that consumption is unlikely to drive growth in the near term.

"With inflation expected to remain above target for longer, economic growth is likely to be driven by external demand in Scotland, and will be a gradual process."

One day after publishing that, Dr Gillespie's team confirmed the latest Scottish export statistics which point to the challenges there.

International exports from Scotland to the European Union failed to recover in the year after the pandemic struck, and in the second year outside the European single market.

The figures show 4% growth in the value of sales to the rest of the UK in 2021, to reach 61% of all sales outside Scotland.

These were dominated by financial services, retail and electricity.

Exports from Scotland into the European Union has struggled since Brexit

That dominance of the UK market is a notable challenge to plans for Scotland being independent and re-joining the European single market

A boundary within the UK's internal market could slow trade in similar ways to the disruption of goods and services trade resulting from a Brexit boundary in the Dover Straits.

The figures show a modest recovery of non-European international exports during the second year of the pandemic, led by whisky and food.

But the data point to a drop of 11.7% in sales into the EU since the UK left the single market, with no recovery in year two.

We're nearly two years on from that. These figures were delayed by the pandemic.

But with war in Ukraine and in Gaza, structural weakness in the Chinese economy, persistent price inflation in many developed nations and higher interest rates for many, global demand does not look like being a quick solution to the lack of investment and consumer spending in Scotland.