Signs of economic clouds parting as this year's Royal Highland Show prepares to start - Marcus Wright of Royal Bank of Scotland

It has been looking like the backdrop to this year’s Royal Highland Show (RHS) is, in a word, rain. This marks the 44th year of RBS’s partnership of arguably the country’s most important agricultural event. This year it comes on the back of what has been the sixth-wettest spring since 1836, according to the Met Office. And if that wasn’t difficult enough, it’s been a rollercoaster for farmers in recent years, and that’s putting it mildly.

Rewind the clock to 2022, and the UK was experiencing its worst period of drought in almost 50 years. Remember those reservoirs running dry? If the impact of climate change is greater volatility in our weather, as well as wetter winters, then the past couple of years have lived up to that billing.

That’s had some big consequences for farming. Soggy fields, and farmers missing out on planting because of this, have been a feature of late. The Energy Climate & Intelligence Unit estimated last month that the projected reduction in key arable crops as a result of lower crop area and poor yields will reduce UK self-sufficiency across all farming sectors by 8 per cent.

Preparations for the Royal Highland Show opening to visitors. Picture: John Devlin.

And forecasts from the Agriculture and Horticulture Development Board estimate that UK wheat imports will reach 2.175 Mt this season, up 60 per cent on 2022/23 levels. This is also the highest since the 2020/21 season, following the poor harvest. Barely imports are also estimated to be up by a similar level.

While the clouds continue to gather in a literal sense, it’s ironic that when it comes to the economy, they’ve parted. It’s a brighter economic backdrop to this year’s RHS than last year’s. The UK economy has begun 2024 is reasonably good health, quickly consigning the recession in the second half of 2023 to history. Gross domestic product (GDP) rose by 0.6 per cent in the first quarter of the year, according to the Office for National Statistics (ONS), the fastest pace of growth since the Covid rebound was barrelling along back in 2021.

There’s work to do. GDP is still just under 2 per cent higher than prior to the onset of Covid more than four years ago. The US economy, by contrast, is 9 per cent above its pre-pandemic high watermark.

Scotland’s performance has been similar, growing by 0.7 per cent in Q1, according to the Scottish Government, a little quicker than the UK. Retail and wholesale, hotels and catering, and transport and storage were the sectors scoring highly in the growth league from January to March. Meanwhile, the Royal Bank of Scotland purchasing managers’ index (PMI) scored 55.2 in May, up from 53.8 in April, signalling that private sector activity expanded for the fifth month running and at the strongest pace in two years. A strong first quarter wasn’t a flash in the pan, in other words.

The agricultural sector is seeing increased interest in its importance, says Wright. Picture: Ian Jacobs.

At last year’s RHS, inflation was running high at close to 9 per cent. Economists and central bankers were discovering that inflation had a sting in the tail, leaching into the services side of the economy and necessitating a firmer response from the Bank of England. But not long after, the economy hit an inflection point – inflation retreated, and a tight labour market (as well as employees keen to negotiate some clawback from lost earnings power) kept wage growth elevated, outpacing inflation ever since.

And not just a little. In 2024 so far, earnings have outpaced inflation by almost three percentage points. Compare that to the typical pre-covid pace of closer to one percentage point. That’s paved the way for a recovery. The reduced uncertainty around where interest rates would end up, as well as the end of the inflation, has also been critical.

Again, there’s work to do. Household incomes have yet to recover from the cost-of-living squeeze, even if the direction is firmly positive. And prices are still high. Food prices are still rising, just by a lot less. Households have dealt with higher mortgage rates better than anticipated, utilising savings, combined with strong growth in earnings, so as to limit the adjustment to spending. Not that there hasn’t been some.

But the broader consumer backdrop is reasonably firm. The labour market remains tight. According to the ONS, unemployment is just 4.4 per cent across the UK and only marginally higher at 4.7 per cent in Scotland. Firms may have pulled back from hiring (although the latest Scotland PMI flagged some renewed momentum in recruiting activity during May). But they’re not letting staff go. And consumers have been saving a lot – the savings ratio is still around twice the pre-Covid level. There’s room to loosen the purse strings, in other words. And it’s a hoped for pillar of support to cement the nascent economic recovery through this year and beyond.

With inflation in retreat attention has turned to when central banks will pivot into reducing interest rates. But if rain characterises the agricultural sector, economic developments in 2024 can be summed up, less succinctly, with the phrase “sticky inflation delaying rate cuts”. That’s not just the case here, but right across developed economies.

Services joined the inflation party last year, and haven’t left. At close to 6 per cent in the UK it’s twice the pre-Covid run-rate. A return to 2 per cent inflation on a sustained basis simply isn’t possible unless it comes down. Forward-looking indicators suggest it might just be a case of patience, including the PMI survey for Scotland, which points to gradually moderating price pressures.

And so the backdrop for the agricultural sector this year is both one of profound challenges, lingering uncertainty, but also brighter skies, in parts at least. It shouldn’t be surprising, then, that the sector has been a laggard amidst the broader economic recovery. Economic output in the agriculture, forestry, and fishing, sector in Scotland is down by around 1 per cent over the past year. The wider UK is little better with output effectively flat.

That hasn’t moved the dial on economy-wide GDP. Agriculture is less than 1 per cent of UK GDP and a little more north of the Border at 1.5 per cent of output. But those low figures mask importance in other ways. As the Scottish Agricultural Census noted last year, the total agricultural workforce in Scotland is estimated to be around 66,800, roughly equal to the population of Greenock. And a well-recognised destination for seasonal work, with 8,300 casual and seasonal workers last year (that’s actually stable compared to the five-year average, despite the reports of hiring difficulties in recent years). And 70 per cent of those are from outside the EU.

Those modest GDP figures understate the sector’s true importance in other ways, too. Greater awareness of supply chains following the pandemic, the situation in Ukraine, and the cost-of-living crisis have all put renewed emphasis on food security. Indeed, the Department for the Environment, Food and Rural Affairs last month began publishing the UK Food Security Index, containing nine indicators including biosecurity risk, energy, and fertiliser prices, and consumer confidence in supply-chain actors.

Encouragingly for farmers, the productivity indicators scored well. Overall, the index found a “broadly stable picture”, but unsurprisingly flagged that is should be seen in the context of the “longer-term risk from climate change”.

So while fears over the weather weigh heavily, the sector can console itself with tangible renewed interest in its strategic importance.

Marcus Wright, senior economist, Royal Bank of Scotland