Economic recovery and the year ahead

Malcolm Buchanan is Chair of the Scotland Board at Royal Bank of Scotland and SFE’s board sponsor for economic recovery.

We begin 2022 with a slight sense of déjà vu, at the tail-end of another wave of covid-19 which put a dampener on Christmas and New Year plans for many of us, whilst adding a new twist to the trajectory of our economic recovery. The Omicron wave is now receding, with signs that infections and hospital admissions have peaked, but a growing list of economic challenges continues to stack up.

Inflation is at a near-three-decade high, rising to 5.4% in the twelve months to December. If forecasts are to be believed, by April we may have passed the 7.1% level last seen in 1992. Inflation is following similar patterns globally, causing headaches for politicians and central bankers from the US to South Korea. 

Back on home soil, businesses continue struggling to find workers, especially in the hospitality, health and construction sectors, while households are facing a two-pronged challenge of rising food and energy costs.

Looking back to just a few months ago there were some encouraging signs with growth reaching 0.9% in November, the strongest wave since June and the first point output has gone above its pre-pandemic level. Supply chain issues in construction and manufacturing eased, unlocking the best showing in these sectors since March, while consumer-facing services also continued their recovery. These encouraging signs were then derailed in December and as the story goes, we left 2021 with a whimper.

While the good momentum in the run-up to December makes a decent case for a robust post-Omicron bounce, UK economic activity pointed to slower growth in January. Eating out, shopping, spending and traffic all fell in early January following the Omicron wave – as did online job ads by 4%, while about 3% of the workforce were off sick. The good news is that manufacturing PMI performed well, as a rebound in the availability of supplies led to a faster rise in output (to 53.8, from 53.6).

Overall its fair to say we begin the year with a mixed picture: the economic recovery has hit a speed bump and some of the long-term scarring effects of covid-19 are beginning to set in, but there are also reasons to be optimistic.

Looking at the big picture, we expect to see a strong recovery in the year ahead. The IMF may have slightly downgraded UK growth predictions, but they are still strong, coming in at 4.7%, comparatively higher than other European nations.

Much like the rest of the financial services sector, the banking sector has performed well over the course of the pandemic, and has come through the worst of it with a strong sense of purpose. We have facilitated an unprecedented amount of government-backed lending through the various covid-19 loan schemes that kept businesses afloat. Losses were lower than expected and banks have been boosted by a buoyant housing market.

The outcome is that banks remain well-capitalised and determined to use their strength to support the economy on a range of fronts.

Firstly, the sector is ready to support businesses through the current turbulence they are experiencing through inflationary pressures, labour shortages and supply chain challenges.  We can support businesses to meet day-to-day cashflow needs through increasing their liquidity. We will also see a greater focus on recapitalisation for those businesses that are struggling with debt but remain viable.

Secondly, the banking sector is determined to support economic growth and development opportunities. Business investment rose sharply in 2021 and we expect an even stronger rebound in 2022. While businesses are experiencing wage inflation and price increases, demand for products and services is strong, confidence is rising, and many businesses have clear growth trajectories.

Thirdly, the sector can and must play a central role in supporting businesses and households to become more sustainable and meet their net zero requirements. There are clear challenges associated with net zero, particularly for SMEs, but more and more are seeing it as an opportunity to build stronger, more sustainable business models and there is a real drive across financial services to invest in this opportunity and create a greener economy.

Green mortgages are just one example of how we can achieve this. Our research shows that 70% of NatWest Group customers are concerned about climate change but are unsure about how to reduce their carbon footprint. Green mortgages are helping customers realise these personal goals while giving businesses real incentives to improve the sustainability of their business models.

In summary, while there are many different pressures on the economy right now that are creating various challenges for businesses and households, I believe we are starting the year with some positive momentum and I am reassured that our sector is well-placed to support the economic recovery. Through SFE’s five year strategy we have a positive vision that the entire sector can get behind for a stronger, greener and more inclusive economy that creates long term prosperity for customers, colleagues and communities across Scotland, and I am optimistic that we will make real progress in realising this vision in 2022.