Signs of growth may not be all good news

SHARP rise in new car registrations in Scotland is an encouraging economic signal. Car sales always see a surge in September, when new registration plates are issued, but sales last month rose 14% compared with the same period last year.

The motor industry has welcomed the development. Meanwhile the hotel trade also has reason for satisfaction with year-on-year growth of 16.8% in revenues, Scotland-wide. But it is wise to be cautious about the extent to which these pieces of good news indicate a longer-term resurgence in the Scottish economy.

Indeed, it is worth pondering what lies behind some of the growth which has been seen in recent months. Growth based on shopping rather than manufacturing, and without robust indications that businesses are investing, does not feel like the foundation of a sustainable upturn.

Yes, the services sector has grown at its fastest pace for 16 years in the last quarter to September, as we reported yesterday. People appear to be spending more, but we know that real incomes are still falling. Where is the spending coming from? It may be from precautionary savings, set aside during the downturn as insurance against further austerity.

Or it could be that people are taking on new debt, in many cases before they have cleared existing liabilities. It has been suggested that repayments of unfairly charged payment protection insurance may account for some of the increase. The limitations of all of these for long-term growth are obvious: savings run out and can only be spent once. Increasing indebtedness is a finite method of spending.

What growth there is comes, of course, against the backdrop of a very low base level. This can make it look more impressive than is truly the case.

Despite Chancellor George Osborne claiming the economy is turning the corner, as he did last month, the Bank of England governor Mark Carney has expressed a more realistic interpretation of the current scenario: too little growth outside London and the UK recovery the slowest on record. The UK economy is still 3% adrift of pre-recession levels, while the US and Germany have both moved ahead of their pre-recession output.

It could simply be the case that given the depressed economic backdrop, some kind of uplift in some sectors was inevitable. Ask businesses whether the current market looks and feels like a sustained revival and many have their doubts. An over-dependence on the consumer sector is worrying.

The final caveat is that what growth there is has been achieved with interest rates at a record low. This is partly the reason why there is concern, and rightly so, about the possibility of a new housing bubble.

First-time buyers do need help to get on the housing ladder, but relying on housing to deliver growth is far from wise, and feels like a belated response to sluggish results from efforts to boost manufacturing and exports.

Meanwhile, if house buyers are taking on mortgages without considering how the repayments may change if and when interest rates rise, that too should set alarm bells ringing.