A beacon of success

Demand for property is derived from activity across the economy. Consequently what matters most to this sector is what is happening – and anticipated – in macro terms.

Unfortunately, this is the most precarious time for our economy that I can recall for many years. The outlook is rife with macro-economic risks – ‘credit crunch’, possible US recession, massive exchange rate volatility, etc. Further, our still new SNP Government must also accept that the public finance climate has become less favourable and that its Westminster-based counterpart will not be going out of its way to simplify matters for those in authority in Scotland.
The latest data show that in the year to the second quarter of 2007, the Scottish economy grew by 2.3 percent, with growth of 0.9 percent in the quarter. This compares with UK figures of 3.1 percent and 0.8 percent respectively. (Scottish relative underperformance is not a novel feature. Over the period 1976-2006, Scottish GDP growth is estimated at 1.9 percent per annum compared to 2.3 percent for the UK as a whole.) Over the year to Q2 the construction sector in Scotland out-shone its UK counterparts and exceeded overall GDP growth; but in that second quarter growth in Scotland was led by the service sector, with construction decelerating to a mere 0.2 percent. This deceleration was indicative of more difficult times ahead for property, as housing market concerns fed through. The Scottish housing scene may be holding up better than the sector south of the border, but deceleration is certainly the order of the day.

Returning to those global uncertainties, the ‘credit crunch’ derives from rising financial sector debts due to the sharp US housing market slowdown associated with US consumer concerns and, fundamentally, the need for a major rebalancing across the US and other major economies. The impact has been felt through a number of channels and will inevitably impact to some extent on GDP growth in the ‘real’ economy.

Certainly, UK business and consumer confidence have fallen back sharply, suggesting much slower growth ahead. The Monetary Policy Committee has responded with one cut in interest rates, despite genuine inflation concerns. To this observer, while consumers tighten belts, businesses cut back on investment and the global economy stutters, the risk of a sharp growth deceleration is more substantive than that of spiralling inflation. This analysis points to one, two or even three further interest rate cuts during 2008. That should assist to keep the economy moving, but the external factors will be more important in determining the outlook for this year and next than the odd interest rate cut.

Within Scotland, we face the exciting prospect of a new look at most elements of economic policy and at relative priorities for public expenditure. My firm view is that high up the priority list should be efforts to maximise the efficiency of delivery of public services and to encourage innovation and creative activities. In the short to medium term, while funding constraints are sorted, there may be adverse impacts on infrastructure spend; but at least further out there is the excitement of preparing for Glasgow’s Commonwealth Games.

In summary, 2008 may prove the most difficult year for our economy since the recession of the early 1990s. Watching external events alongside the MPC’s behaviour will provide the best guide to prospects. Then, when we are through this particular patch of choppy water, it will be appropriate to maintain a watch on the new Scottish Government, in terms of both priorities for public expenditure as funds become more constrained and policy evolution. And finally, there is the continuing ‘conversation’ on enhanced devolution or possibly independence. Interesting times indeed!