Oil price slump hurts Scottish economy

The slump in the oil price and woes in manufacturing saw Scotland’s economy grow at just a quarter of the rate of the UK as a whole in the third quarter, fuelling the divergence north and south of the border.

The differing economic growth north and south of the English border could have political and constitutional implications in the febrile aftermath of Scotland’s 2014 independence referendum.

Economists said the third-quarter 2015 data for Scotland’s onshore economy suggested growing damage from the oil slump. Gross domestic product grew just 0.1 per cent in the quarter from the previous three months, compared with the 0.4 per cent achieved by the UK as a whole.

The Scottish National party (SNP) is on course to win a landslide in May’s Holyrood parliamentary elections, shrugging off a collapse in oil prices that has made a mockery of its pre-referendum fiscal forecasts and is causing increasing pain among companies supplying and serving the energy industry.

Job cuts

In the latest blow, international oil major BP announced this week that 600 jobs would be cut in its North Sea-related operations, including in Aberdeen and the Sullom Voe terminal in Shetland.

The news came just days after Petrofac, an oil services company, said it would axe 160 jobs.

Scotland had already underperformed in the second quarter of 2015, with growth of 0.1 per cent trailing the 0.7 per cent recorded then for the UK.

“Quite clearly the Scottish economy is diverging from the rest of the UK,” said Professor Brian Ashcroft of the University of Strathclyde’s Fraser of Allander Institute. “It’s largely driven by the low price of oil.”

Only growth in the Scottish construction sector exceeded that of the UK as a whole, with services expanding more slowly and manufacturing contracting by 0.1 per cent.

But economist John McLaren of the University of Glasgow Business School said the construction sector’s contribution to growth was set to decline as large infrastructure projects wound down.

“If this activity is not replaced by higher output elsewhere then the overall growth rate of the economy could fall to closer to 1 per cent a year than the two per cent average we’ve experienced over the last couple of years,” Mr McLaren said.

Continuous expansion

Scottish and UK ministers sought to accentuate the positive in the data, which showed Scotland’s economy had now enjoyed three years of continuous expansion.

But John Swinney, Scotland’s finance secretary, acknowledged that the economy was facing “significant challenges” including a slowdown in global demand.

“This is a situation exacerbated by the continuing low price of oil and the effect this is having on the industry and its supply chain,” Mr Swinney said.

Mr Swinney’s and his SNP colleagues have shrugged off reminders that the collapse in oil revenues would have meant a severe fiscal crunch if Scotland had, as they hoped, been set to become an independent state on March 24th this year.

Opposition parties have also accused the nationalists of being complacent about the difficulties of the North Sea sector, seizing on the claim this month by an SNP member of the Scottish parliament that there was “no crisis” and the sector was “booming”.

Nicola Sturgeon, SNP leader and Scotland's first minister, this week acknowledged that some companies and employees were in crisis, but also noted that the positive impact of lower fuel would have "to some extent a balancing effect" on the wider economy.

Boost growth

The problem is that the balancing effect appears to be weaker than some analysts had expected and with no appetite for tax cuts, the devolved Scottish government has limited ability to boost growth in the short term.

The SNP on Wednesday sought to turn the economic focus on the UK government with an opposition day debate in Westminster in which it claimed the Conservative government was failing on key economic indicators.

George Osborne, UK chancellor, was failing to meet his promise to rebalance the economy toward manufacturing, complained SNP deputy leader Stewart Hosie.

There was a glimmer for the oil sector on Wednesday when it emerged that Premier Oil, one of Britain's biggest independent oil companies, was in talks to buy North Sea fields from Eon, the German utility, for £100 million.

Some in the industry had feared that the fields would not attract interest from prospective buyers.

But Prof Ashcroft said Scotland itself needed its own rebalancing, away from dependence on oil-related manufacturing and services and from financial services, which contracted 0.1 per cent in the third quarter of last year.

Scotland would this year continue to recover from the recession that followed the 2008 global financial crisis, but progress could not be taken for granted, he said. “The recovery is still tentative . . . there’s a lot of uncertainty.”

- Copyright The Financial Times Limited 2016