Counting the cost: the state of Scotland's economy

The John Lewis store in Aberdeen had, at one point, been one of the chain’s most successful stores, even occasionally outperforming the Oxford Steet flagship. 

It opened in 1989 as North Sea oil entered a new period of boom with the industry providing for more than 54,000 well-paying jobs in the north-east. 

Over three floors of the brutalist Norco House building, the city’s well-to-do middle classes bought up home furnishings, electrical appliances, expensive-ish clothes, stopping now and again for an afternoon tea in one of the two food halls. 

However, last year, following “substantial research to identify and cater for new customer shopping habits in different parts of the country,” the department store was closed. 

It had, the partnership said, been “financially challenged prior to the pandemic,” but shoppers forced to stay at home, and that general trend towards shopping online, made those challenges insurmountable. 

At first, the city tried to force store bosses to change their minds and save the jobs of the 265 staff. 

Councillors, MSPs and MPs established a task force. The Press and Journal newspaper ran a ‘save our store’ campaign. More than 20,000 people signed a petition. 

It was an institution and Aberdonians felt its disappearance keenly.

“Having been there when it opened it feels as though a chunk of my life is being cast aside,” one local wrote in a letter to the paper. 

The campaign was about more than just readily available haberdashery and luxury cosmetics, it was about the future of the city. A city that had prospered and now faces an uncertain future. 

It was all to no avail. The decision was final. Aberdeen no longer has a John Lewis, a victim of the drop in onshore revenues generated by oil and gas, and the damage of coronavirus.

The plight of the department store was raised by Professor Keith Bender when Holyrood asked him about the prospects for Scotland’s economy. 

The SIRE Chair in Economics at the University of Aberdeen’s Business School is wary about confidently predicting the future. 

“If I really knew that I wouldn’t be a professor,” he says. 

“I think the two biggest unknowns, and these are particularly relevant for the Scottish economy, are what’s going to happen to oil and gas, because even if you don’t include the value of production offshore, clearly a lot of people work in that sector. 

“And by bringing in money that helps stimulate the economies of the north-east of Scotland in particular, but not just the north-east of Scotland because we know people come from all over Scotland to work. So clearly, that’s a huge unknown. And we’re not sure how that’s going to affect the economy. 

“The other one is about retail and whether this movement away from the high street continues even more.

“I mean, all the indications seem to be that Covid has accelerated that movement away from bricks and mortar stores, as they call them, to more online retail. 

“That centralises the sort of economic impact of that because it doesn’t really leave it on the high street, where you have both sort of typical high street stores. 

“I mean, much like Aberdeen losing John Lewis earlier this year, and British Home Stores and I mean, really in Aberdeen there’s just Marks and Spencers left as the only sort of big retailer here. 

“Obviously that takes away jobs, that takes away investment in the local economy. Amazon has distribution centres and are hiring drivers and all of that but the challenge with those kinds of jobs, as we’re seeing now, is that many of those are quite precarious jobs. And while that may fit into the way some people want to work, for most of us, who have a mortgage and have kids and such, we don’t like precarity.”

Scotland’s economy is, the professor says, doing “okay”. It could be better and it could be worse. 

After falling by more than 20 per cent at the start of Covid lockdown, Scotland’s GDP – the figure used to measure the output of the economy – has continued to creep back towards pre-pandemic levels. In October – the most up-to-date figures available at the time of going to print – it was just 0.4 per cent off where it was in February 2020.

Around three-quarters of Scotland’s economy is made up by the services sector, which covers everything from banking and financial services to government spending to accommodation and food services.

Output there grew by 0.3 per cent in October, with increases in eight of the 14 subsectors. 

In the other sectors, production, (mining and quarrying, manufacturing, electricity and gas supply, and water supply and waste) which accounts for around 16 per cent of the economy grew by one per cent. 

While construction, which weighs in at 6 per cent, fell by 3.4 per cent as supply chain issues continued to bite. 

In December, the Scottish Fiscal Commission (SFC), the independent body responsible for producing independent forecasts for Scotland, predicted GDP would return to pre-pandemic levels in the second quarter of 2022.

The economic recovery had, they said, “been faster and smoother than we expected.”

And while the forecasts were finalised before the emergence of the Omicron variant, they were relatively confident the impacts would fit within their central assumptions

Those assumptions include the unemployment rate peaking at 4.9 per cent, down significantly from their January 2021 forecast which peaked at 7.6 per cent. 

While the pace of the recovery has been far better than expected, the Scottish economy is still lagging behind the UK. 

Compared to pre-pandemic levels, GDP, employment and earnings have recovered more slowly than in the UK. Though this is also skewed by strong figures for growth in London’s financial sector. 

It also goes back to the fate of Aberdeen’s John Lewis, and the impact of declining North Sea oil and gas activity and the move away from the high street.

Professor Bender says there are reasons for optimism, though the opportunities are “fragile”. 
“I think in terms of oil and gas, the thing that would substitute for that then is other forms of green energy production. 

“So we know that there’s been a huge investment in wind energy and wind farms both onshore and offshore. I think that’s an important thing. You’re going to have to replace the energy production somehow. 

“But as we’ve seen over the last however many months, three or four months, if there’s a reduction in the amount of wind, then you’re not producing as much electricity. 

“I think there’s an opportunity for creative ways of thinking about new green energy production, and it’s something that will have to be done. Whether that’s done by government or by industry, I don’t know but it has to be done. 

“I guess the opportunity in terms of retail, and you see this just slightly is, movements to shopping local type of initiatives, perhaps smaller entrepreneurs coming up and really pushing on on that. That’s a possibility. 

“But the problem is that you have to have a lot of those small entrepreneurs to make up for a major retailer leaving so you would need perhaps 40 Or 50 Small employers to make up that same level.

“So yes, there’s a lot of uncertainty. There are opportunities there but they’re quite fragile.”
The academic says there are other areas where there could be growth, particularly in tourism and hospitality.

“You know, I’ve been in and around Aberdeen for over 20 years now, even though I’m originally from the States and there’s a much better recognition of food and such. Think about 30 years ago and the typical British meal, at least as it was observed, is something very different than today. 

“And there is a focus on local produce and, and we do a really good job of those kinds of things. Of course, tourism is going to be very affected by Covid. It may well also be affected by ideas of trying to green the economy. We know that aeroplane travel is not the most ecologically and environmentally sound way of travelling and being on an island makes it quite difficult, not impossible, but quite difficult to get here. So I think there are challenges there too. But clearly, it’s something that Scotland, in particular, can really, really try to push.”

However, areas like manufacturing and financial services are, he thinks, “probably pretty much maxed out”. 

It’s impossible to discuss the state of Scotland’s economy without talking about the constitution. 

Nicola Sturgeon has said she hopes to hold a second referendum on independence before the end of 2023. 

The economy dominated the 2014 vote and has been a battleground in the proxy indy war that has been fought in the years since.

That proxy war never gets more heated than with the annual publication of the Government Expenditure and Revenue Scotland (Gers) report, which sets out details of the government’s spending and the amount of money raised. 

The most recent statement revealed that Scotland spent £36.3bn more than it raised, a notional deficit of 22.4 per cent of GDP.

Obviously, much of that eyewatering difference is down to Covid spending, but in the previous year it stood at a still significant 8.6 per cent of GDP.

Depending on who you talk to, this gap either makes the case for independence or remaining in the UK.

Scotland’s finance secretary Kate Forbes said the GERS figures “strengthen our calls for additional fiscal and economic powers to manage our finances in a sustainable fashion, like every other advanced economy around the world will be doing.”

“We simply cannot afford not to have the powers of a normal independent country,” she added.

However, Tory Scottish Secretary Alister Jack said the figures showed Scotland “benefitted from being part of a strong United Kingdom.” 

He said: “Unprecedented UK Government support has allowed us to treat patients, vaccinate people, protect a third of our workforce through furlough and issue crucial loans to more than 90,000 Scottish businesses.

“We have been able to weather the Covid storm as part of the UK but we now face the challenge of rebuilding our economy and supporting our heroic NHS and other public services. Our focus remains on that task.”

One of the big economic debates at a future referendum will be around trade. 

How will an independent Scotland set up trading relationships with the rest of the UK? Brexit and Northern Ireland have given us an insight into exactly how difficult that is. 

And then what about Europe and rejoining the EU and what the complexity of that may mean for the economy. 

A recent report by trade modellers at the London School of Economics (LSE) suggested the costs of independence to the Scottish economy would “likely to be two or three times larger than the costs of Brexit, and rejoining the EU following independence would do little to mitigate these costs.”

It adds: “From a trade perspective, independence would leave Scotland considerably poorer than staying in the United Kingdom.”

There are difficult questions ahead and, unlike in the referendums of 2014 and 2016, voters will be expecting answers with a lot more detail.