UK interest rate rise ‘would hit Scottish recovery’

Scotland’s economic recovery would be put at risk if the Bank of England raised interest rates to cool London property prices, according to a report by the University of Strathclyde’s Fraser of Allander Institute.

Pro-union politicians have expressed concern that uncertainty created by the independence referendum could hurt the Scottish economy even before the outcome is known.

But the institute said that three months ahead of the vote, the economy was recovering well, with household spending strong and investment picking up.

Brian Ashcroft, emeritus professor at Strathclyde university, said the most worrying threat to the recovery was the London house market boom.

“We believe the Bank of England must avoid raising interest rates on that account,” Prof Ashcroft said.

“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.”

Other leading risks to the Scottish recovery included the gap between high growth in household spending and weaker investment and export growth, as well as falling wages across the UK and deflation in the eurozone, the institute said.

“We are still a long way off from a balanced recovery,” it said. “Investment does seem to be picking up and it is to be hoped that this will continue, because the prospects of a marked improvement in the net trade position with sterling high and the European economies weak, [do] not look promising.”

Some pro-independence politicians say a strengthening economy could help the nationalist cause in September by helping to foster confidence among voters that Scotland could prosper outside the UK. The Scottish National party has made emphasising the nation’s wealth a core plank of its campaign.

In depth

Future of the union

Scotland will decide in a referendum to be held on September 18 2014 whether or not to end the 307-year-old union with England

However, supporters of the union say independence would cause economic disruption and undermine future growth by creating barriers between Scotland and the remaining UK, by far its biggest trading partner.

The SNP will also not be able to seize on the possible threat to the recovery from London-centric monetary policy, as it has said it hopes independence would be followed by creation of a currency union with the UK under the stewardship of the Bank of England.

Concerns that referendum uncertainty could derail the recovery or chill investment have so far not been borne out.

The Fraser of Allander Institute raised its forecast for Scottish gross domestic product growth to 2.5 per cent, up from the 2.3 per cent predicted in March.

The EY Item Club this week forecast growth of 2.4 per cent, saying 2014 was “shaping up to be the best for Scottish economic growth since the onset of the financial crisis”.

“Available data doesn’t provide any significant signals of the economic impact from uncertainty engendered by the referendum,” said Dougie Adams, senior economic adviser to the forecaster.

EY’s annual attractiveness survey found Scotland cemented its status as the UK’s leading destination outside of London for foreign direct investment, with the number of reported projects rising 8 per cent in 2013 and falling just short of the 1997 record.

However, industry analysts say some investors, particularly in the property market, are taking a more cautious stance as the referendum nears. While all credible opinion polls show a clear lead for the campaign against independence, recent survey suggest the gap is narrowing.