Aberdeen “worst hit” by hard Brexit, experts predict

BBC, today:

Aberdeen could be the city worst hit by falling economic output due to a “hard” Brexit, experts have predicted.

A new report from the Centre for Cities and the Centre for Economic Performance at the London School of Economics said all cities would see a fall in output due to increasing trade costs.

Aberdeen and Edinburgh were both ranked among the ten most affected cities.

However, the study said both cities are also among the best-placed to respond to any predicted economic turbulence.

The full report can be read here.

Most and least affected cities (% change in Gross Value Added)
Most affected cities (% change in Gross Value Added). Source: Centre for Economic Performance analysis, 2017. From report Brexit, trade and the economic impacts on UK cities (figure 3, page 5)

 

July Fraser of Allander Institute nowcast suggests recession may have been averted

The latest Fraser of Allander Institute nowcast suggests that a recession in the Scottish economy, following a 0.2% contraction in GDP in Q4 of 2016, may have been averted (caveats—described in the FAI post—apply):

Looking forward, our model currently estimates growth in 2017 Q1 of between 0.2% and 0.3% and a similar rate for Q2.

The information that we have therefore — and comparing such data to historical trends — suggests that the economy has been growing during the first six months of 2017 (albeit below trend).

The latest estimates from the ONS indicate that the UK economy as a whole grew by 0.3% in Q1 of 2017.

Official figures for Scotland will be published on Wednesday.

Update

The FAI has also published its latest Royal Bank of Scotland Scottish Business Monitor results. In summary:

The results from the Royal Bank of Scotland Business Monitor suggest that the Scottish economy grew in the 3 month period to the end of June. This offers some signs that Scottish businesses are remaining relatively resilient in the face of challenging trading conditions.

More encouraging is the outlook, with a greater proportion of businesses expecting higher levels of activity in the second half of the year. Inflationary pressures remain strong however, and this will act as a drag on some sectors. Others, particularly tourism and exporters will continue to see opportunities from the low value of Sterling.

The JMC on EU negotiations: what a total farce

According to the UK government’s Secretary of State for Scotland David Mundell “[t]he Joint Ministerial Committee (EU Negotiations) was established to facilitate engagement between the UK Government and devolved Administrations” in “seeking the best deal for all parts of the UK” in EU negotiations.

John MacDonald, writing in issue one of Cable magazine:

The JMCs seems designed to leave representatives of the devolved nations under no illusions as to who is in charge. JMC meetings have only once been held outside of London. A single meeting was held in Wales. On that occasion, the Welsh government was not permitted to organise the event — it seems that only the UK government has the capacity to undertake that Herculean task.

JMC meetings are always chaired by a UK Minister and are always heavily populated by UK government officials, something which does much to colour the dynamic of meetings. Meetings are scheduled for just one hour. This is surely a ludicrously short time to allocate to a ‘monthly’ meeting on an issue as serious as how we leave the European Union.

Scottish representatives report typically having only around ten to fifteen minutes to articulate Edinburgh’s position during these meetings. They also express concerns over how receptive UK government officials are to discussing areas where there appears to be a divergence of view between Edinburgh and London. Indeed, Scotland’s Brexit Minister Mike Russell is on record as saying that such divergences are not necessarily acknowledged by London; key substantive issues which have been raised during the JMCs have been ‘simply taken away after discussion for UK officials to consider, and they have never re-emerged.’

Mike Russell responded on Twitter: “Correct — but we still need to find a way forward[.]”

(Source for David Mundell quote here.)

Scotland’s economy edges close to recession — but growth forecast to return in the coming months

The Fraser of Allander Institute (FAI) published its latest Economic Commentary yesterday. You can read it here. The main points from the press release:

  • With the Scottish economy shrinking in the final three months of 2016, Scotland is just one data release away from re-entering recession (defined as two consecutive quarters of falling output) […].
  • However, the Institute forecasts that the Scottish economy will pick-up in 2017, although its central forecasts for growth of 1.2% in 2017, 1.4% in 2018 and 1.6% in 2019 are below trend with Scotland likely to continue to lag behind the UK as a whole.
  • The Institute’s new analysis finds that Scotland’s recent economic woes can no longer be explained just by the downturn in the North Sea or indeed by Brexit. Instead, Scotland’s economy seems to be stuck in a cycle of weak growth, declining confidence and poor investment and net export figures.
  • With Holyrood’s Budget now much more dependent upon the relative performance of Scottish tax revenues, getting the economy moving again must be a priority for everyone with a stake in Scotland’s long-term prosperity.

FAI director Graeme Roy added:

“What has been surprising is how little the economy has featured in recent policy debates in Scotland — including in the General Election. With Holyrood now responsible for over £11bn of income tax revenues, it is vital that politicians from all sides come forward with practical policy initiatives that will support businesses, secure new investment and create jobs whatever the constitutional settlement.”

In the “Economic Perspectives” section of the Commentary, David Eiser looks in detail at the new fiscal powers being devolved to the Scottish Parliament as part of the Fiscal Framework agreed in 2016. These include, since April of this year, responsibility for a large proportion of income tax revenues (with some exclusions, such as the personal allowance), and from 2018 complete control over Air Passenger Duty. Then in 2019 the Scottish Government will start receiving half of VAT revenues raised in Scotland.

The report includes a nice summary of the various devolved taxes:

Fraser of Allander Institute: Devolved, shared and assigned tax revenues in Scotland
Source: Fraser of Allander Institute Economic Commentary Vol 41 No 2, June 2017 — Table 1, page 27.

Growth figures for the first three months of 2017 are due to be published on 5 July.

Backing Scotland’s Currency — Foreign exchange reserves for an Independent Scotland

Common Weal has published a new white paper, “Backing Scotland’s Currency — Foreign exchange reserves for an Independent Scotland”, authored by Peter Ryan. From the preface:

The successful management of an independent country’s currency is often tied to its ability to raise and maintain an adequate level of foreign currency reserves. These reserves would be used to stabilise the currency’s exchange rate, protect against speculative attacks on the currency and service debt obligations, amongst other uses. In the case of Scottish independence, it will be important to show that sufficient reserves can be established quickly enough after the launch of a new currency to ensure its stability. It is the purpose of this paper to demonstrate that this proposal is viable.

Ryan reckons that approximately $40 billion (20% of GDP) could be raised to support an independent Scottish currency. Denmark similarly holds in the region of 20% of GDP in foreign exchange reserves1. He estimates that the costs of servicing the debt would be around $70.2 million annually, which is “substantially less than the current annual contribution by Scotland to the UK’s foreign reserves (£500 million per year) which are being built up by the UK government to bail out the City of London in the event of another crash.”

From The National’s reporting of the paper:

Dr Jim Walker, chief economist of Asianomics, said while it was “absolutely correct” that an independent Scotland could raise $40bn in foreign reserves, it was also “absolutely unnecessary”. He described the Common Weal report as a “well-thought-out contribution”, but said many successful independent countries had levels of reserves considerably smaller than 20 per cent of GDP.

“The Czech Republic, until the last two years, had historically a substantial current account deficit making the currency much more vulnerable,” he said. “For Bulgaria that was also historically true but not in the last decade. However, these reserve levels [at 40 per cent GDP] are a result of past deficits. Scotland would run a large surplus.

“Two ‘small’ non-European players with open capital accounts and free-floating currencies, Australia and New Zealand, maintained reserves of 4.5 per cent of GDP and 10 per cent of GDP, respectively, for 2016.

“There is absolutely no need [for an independent Scotland] to be aiming at a 20 per cent of GDP reserve level.”

Peter Ryan’s previous paper, “How to make a Currency — A Practical Guide”, may also be of interest.

Tory campaign strategist Lynton Crosby pushed for Scottish independence vote before Brexit

Politics Home, 26 June:

Conservative election strategist Lynton Crosby urged Theresa May to hold a fresh Scottish independence referendum ahead of Brexit, it has been revealed.

“While it may seem sensible to delay a referendum until after Brexit negotiations are complete this is not necessarily the best strategic position to adopt,” he wrote [in a leaked memo].

“Holding a referendum on independence before Brexit is complete will mean that voters have to grapple with the uncertainty of the outcome of Brexit in addition to the uncertainty of their choice in the referendum.

“Delaying the referendum until after Brexit is complete removes one of these unknowns.”

He said a Brexit outcome that dissatisfied Scots could “easily result in Scotland voting for independence”.

Theresa May ditches manifesto pledges to clear decks for Brexit: Legislative battle ahead to clear hung Commons and Scottish Parliament

FT.com, today, in an article on the UK government’s legislative agenda announced in the Queen’s Speech:

There were growing fears in Whitehall that the Scottish nationalists could hold London to ransom by voting down the Great Repeal Bill—which puts EU law into British law.

Britain’s devolution settlement was developed under the auspices of the EU single market.

The government now believes that the relevant framework should be reset at a UK level, in particular for devolved policy areas such as agriculture, fisheries and environmental protection.

But that requires the authorisation of all the devolved administrations in Cardiff, Edinburgh and Belfast through “legislative consent motions”.

A Conservative official said that there was likely to be sabre-rattling by the SNP during the process, which could take eight weeks, but said there were hopes that Holyrood would not stand in the way. “It’s common sense. There would be major consequences for Scotland if this wasn’t passed, there would be holes in the law,” he said.

The Guardian’s Andrew Sparrow, earlier this evening:

This is a consequence of what is known as the Sewel convention, which says the Westminster parliament should not legislate on matters devolved to Scotland without the Scottish parliament’s approval.

As we learned earlier in the year, the Sewel convention is just that—a convention—and is not (as far as I believe) enforceable by the courts1. The UK Government, however, has thus far not (as far as I’m aware) overridden a vote in the Scottish Parliament. It seems that it could legally do so but in such a scenario we would be in uncharted constitutional waters.

Update: The Guardian has published an article looking in more detail at this issue. The piece includes quotes from Mike Russell, the Scottish Government’s Brexit minister, and Graham Matthews, president of the Law Society of Scotland.

Revealed: The plan to keep EU workers in Scotland

From this morning’s Herald:

Detailed plans have been drawn up for Scotland to set lower barriers than the rest of the UK for low-skilled immigrants after Brexit.

Experts at the University of Edinburgh believe they have devised with a “politically viable” way of sustaining the net inflows of EU workers currently propping up key industries such as tourism, hospitality and food processing.

The landmark report has been welcomed by the Scottish Government who described the current UK-wide approach to immigration as “damaging to Scotland’s economy”.

Business leaders fear the end to freedom of movement and hardline cuts to UK-wide immigration targets following Brexit will spark crippling labour shortages in Scotland.

You can read the paper—‘Scottish Immigration Policy After Brexit: Evaluating Options for a Differentiated Approach’—at the University of Edinburgh website. It looks at the merits of four main schemes1:

  • Human capital points-based systems, drawing on examples from Queensland (Australia) and Quebec (Canada)
  • Post-study work schemes, informed by the examples from Scotland and British Columbia (Canada)
  • Employer-led schemes, with examples from the Alberta (Canada), Switzerland, and the EU Blue Card
  • Occupational shortage lists, drawing on examples from the UK, Canterbury (New Zealand) and Spain

SNP took right-wing constituencies for granted and paid the highest price

Thought-provoking commentary by Michael Fry in The National today:

One thing that has struck me in all the commentary and analysis since the General Election is the refusal to accept that there might be a kind of right-of-centre Scottish nationalism, and that its alienation from the present leadership of the SNP could be a reason for the setbacks last Thursday.

… While Salmond was personally a lefty he could, as a former bank executive, walk the capitalist walk and talk the capitalist talk. That was what he and his colleague John Swinney did at a crucial stage more than a decade ago as they made the rounds of Scottish finance and industry persuading moneyed men that the independence of the country might be good for them too—and that, at any rate, things could hardly get worse than they eventually got under New Labour. All the while Salmond remained First Minister, he continued to cultivate these connections, and with a good deal of success. George Mathewson, Jim McColl, Brian Souter, Tom Farmer, Bill Samuel, Peter de Vink and many others have all endorsed or donated to his SNP. But since 2014 the ample flow of business funding has dried up.

The reasons are not far to seek, and can be found conveniently summarised in the election manifesto the SNP published a couple of weeks ago. Looking inside we find, against dozens of spending commitments and calls for higher taxation, only a couple of lines on how the private sector of the economy (from which all other blessings flow) is to be encouraged and expanded.

GVA growth forecasts for 2017 Q1 and Q2

Nowcasting Scotland, Fraser of Allander Institute, 6 June:

  • Our nowcast for GVA growth in 2017 Q1 is 0.22% which, at an annual rate, is 0.87%
  • Our nowcast for GVA growth in 2017 Q2 is 0.23% which, at an annual rate, is 0.94%

These results represent a downward revision relative to last month’s update [link]. In the context of weak economic performance over recent quarters, this suggests that there is little reason to be optimistic about the short-term performance of the Scottish economy.