A leading think tank has upgraded its growth forecast for the Scottish economy, but warned that risks to the recovery had “widened and deepened”.
The Fraser of Allander Institute said the boom in the London housing market provided the largest derailment threat as it brought the prospect of a rise in interest rates from their historic low of 0.5%
The latest economic commentary publication saw the group uprate its 2014 Scottish gross domestic product forecast from the 2.3% it predicted in March to 2.5%.
However, the institute also revised down its 2015 GDP prediction from 2.3% growth to 2.2% as a result of the increased risks to recovery which it had identified, including an overheating housing market in the capital, a drop-off in wages and deflation in the eurozone.
The group said the Scottish economy was seeing a “strong recovery”, with employment and productivity both up and an improving picture for the production and manufacturing sectors.
The institute said manufacturing GVA (gross value added) had fallen to 7.2% below its pre-recession peak in the third quarter of last year due to the industrial dispute that led to the closure of the Ineos petrochemicals plant at Grangemouth.
Emeritus professor of economics at Strathclyde University Brian Ashcroft said the economic damage caused by the closure of Grangemouth one of the largest stand-offs in Scotland’s recent industrial history gave a false impression of how the economy was doing.
“The Grangemouth dispute which shut down the refinery plant last October lowered Scottish GDP growth in the final quarter of last year and masked the strength of the recovery, while the recovery in the Scottish and UK labour markets is almost unprecedented,” Prof Ashcroft said.
“However, we are concerned that the risks to the recovery have widened and deepened. Household spending is too reliant on further borrowing as real wages have fallen, net exports continue to contribute little to growth, and business investment is only just beginning to pick up.
“But it is the boom in the London housing market that causes us most concern.
“We believe the Bank of England must avoid raising interest rates on that account. With Scottish house prices hardly rising at all, it is inappropriate for the recovery to be dampened across the UK for what is clearly a local or regional issue centred on London.”
In terms of jobs, FoAI said it expected a net increase of 43,100 new roles in Scotland this year.
The institute said it expected that number to fall off slightly to 42,900 next year before a surge to 58,150 in 2016.
Paul Brewer, a partner at PwC in Edinburgh, said confidence among firms had been rising steadily.
“There’s a consistent trend of improving business optimism as the recovery takes hold but it’s yet to feed through into the investment that will help balance the recovery,” he said.
“We don’t see access to finance as a major constraint on investment, certainly for larger companies, so other factors such as the time for investment decisions to be fulfilled and pre-referendum uncertainty will be in play, and we would look for significant step up in investment through the rest of 2014.”