Senior industry figures give their predictions for the next twelve months

POLITICS

Peter Jones, freelance journalist writing on politics, business and current affairs

Is 2013 to be the year of pulling together, or pulling apart? Will nations and their
governments come together to fix the broken global economy? Or will those nations move
further apart and even break up? For any business whose market is bigger
than the Scottish backyard the answers are incredibly important. They mean political
uncertainty, which means customers and suppliers outside the yard fence become
much more cautious and inclined to sit on their hands until more political, and hence
economic and regulatory, certainty appears.
And, since all business these days is a food chain in which success or failure at the top
end filters down to everyone, from the corner shop or cafe to the car repair or decorating
business, the answers are still important for those whose horizons stretch no further than
a few miles away.
The answers we get next year, I'm afraid, will not be clear. They may even be
contradictory. If we are lucky, at least they will show what the trend is.
The need to pull together is most obvious in Europe, overhung by a sovereign debt crisis
which shows little sign of going away. The story here has been a bit like a dam that is
threatening to burst amidst rains which never stop. The EU, while it has been talking about
fiscal integration, creating a new dam that wont burst, has instead been rushing about
sandbagging the existing dam. This solves the problem for a while but then new pressures
build up and more sandbags are needed.
But at the October EU summit, the first major step towards the new dam was taken
by deciding to establish a single banking supervisory mechanism in the European
Central Bank, a move that will eventually lead to a full banking union. This is not just a
technical addition of some of the machinery needed to buttress the currency union but
also a significant act of political integration.
The proof of that came in the rapturous reception accorded to Angela Merkel when
she went straight from the summit to speak to her sister party, the CSU, in Munich. The
EU works by pooling national sovereignty, both to create level playing fields in which all
participants in theory at least gain, and also to enable transfers from richer to poorer
countries.
Germany is the principal paymaster and Germans have become increasingly worried
that there is, in financial and fiscal matters, too much transfer and not enough pooling.
The reaction of the highly conservative CSU suggests Mrs Merkel has gone a long way to
assure German opinion that more pooling and hence more EU supervision of errant
states is going to happen.
The point of ECB Eurozone banking supervision is to enable it, rather than national
governments, responsible for bank bail-outs, breaking the link between bank and sovereign
debt, easing pressures on the latter. But this wont come into play until later in 2013. When
that date is settled it will become a key one as it will lift a lot of uncertainty, so businesses
need to watch out for it.
But against this coming together trend, there is also the pulling apart tendency
operating within nation states. This is not just obviously of concern in Scotland, but is also
evident in Spain and Belgium.
A key event will be the publication of the SNP government's white paper on
independence – the prospectus for what it thinks independent Scotland will look like and
the rights and obligations it will have. No date has been set but the autumn looks likeliest.
Businesses may be hoping this document will answer key questions. What is the basis
for the SNPs assertion that Scotland will be an EU member state? How will it be achieved?
Will Scotland have to accept the Schengen agreement on open frontiers and what would
that mean for the frontier between Scotland and the rest of the UK, which is outside
Schengen? Will Scotland be compelled to join the euro? If not, how can agreement to be part of UK sterling zone be achieved? Will there be Scottish, instead of UK, regulation of financial services, health and safety, energy, and so on?
Exactly how reliable answers can be provided intrigues me. To be cast-iron they
would have to be agreed by the EU and the UK Government. But the EU is highly reluctant
to do so because that would be tantamount to interference in a nation states domestic
politics. The UK Government is equally reluctant because it wants the SNP to lose the
vote. So how do we get the answers we need?
And there is the big question behind that. Why, if integration makes sense in Europe,
does disintegration make sense in the UK? The SNP's answer to that is the most intriguing
of all.

EXPORTS
Ken Barclay, head of corporate banking division, Scotland, The Royal Bank of Scotland

In the last five years global trade has grown at its slowest rate in a generation. But 2013
should mark a turning-point for the better. The International Monetary Fund says
world imports will increase by six per cent, much faster than last years four per cent. Will
that be enough to help Scottish businesses break a decade-long losing streak of stagnant
exports?
There are reasons for optimism: we have growing numbers of great businesses with
excellent products. The burgeoning middle class of East Asia and South America craves
the quality and kudos of whisky, a premium product that attracts aspirational people.
Across the world, the prospect of English language teaching from a Scottish institution
retains a lustre. Scotland benefits whether we teach students here or overseas.
For all that we moan about our weather, more than two million people
visit Scotland each year. We can push that figure higher as the opportunities of the
Commonwealth Games and the Ryder Cup beckon in 2014.
And we are making the most of some of our luck. J Paul Getty famously said the formula to
his success was to rise early, work hard, strike oil. Not only does Scotland have a thriving
offshore sector, we are taking its strengths and successfully selling them around the world.
These are no guarantees of success.
But they provide an excellent platform as Scotland rises to the challenge of breaking
further into the growth markets that lie beyond debt-bound Europe.

MANUFACTURING
Peter Hughes, chief executive, Scottish Engineering

As we move towards 2013, Scotland's engineering companies remain
resilient against a background of some uncertainty related to three specific
areas: the problems in the Eurozone; the activity or non-activity within
the banking sector; and ineffective intervention by politicians.
Our prediction regarding the Eurozone is that European politicians
will eventually find a way to tackle the financial crisis in Greece and beyond
in a way that will encourage market stability, an area that is particularly
important to our sector as more than 50 per cent of our manufactured
exports are destined for the Eurozone.
The larger companies currently operating globally are expected to
maintain their strong international performance, especially those who are
not over-dependent on the Eurozone.
We need to see banks improving their support for hard-pressed SMEs.
While there has been very little evidence of real help coming from the
financial quarter so far, I predict this will change, albeit slowly.
Politicians north and south of the border must ensure businesses are
given a reasonable level of certainty as they look to the future. We need
a balanced, sustainable, affordable and secure energy policy, a future for
our defence sector and an education system that is fit for purpose.
While we anticipate that the strong performance of those involved in
the oil and gas sector will continue, advances could be somewhat
constrained by a range of skills shortages. 2013 will see an ongoing
shortage of key skills including project engineers, design engineers and oil
and gas specialists plus shop floor personnel like CNC operators for our
high-performance machine shops.

RETAIL
Professor Leigh Sparks, professor of retail studies, Institute for Retail Studies, University of Stirling

It is nic e for once to look back to my predictions from previous years and to see all I said has come true. The problem is my prediction for retailing in Scotland last year was that were all doomed. So is there any silver lining for retailing this year?
On the plus side there is some evidence online retailers are successfully meeting consumer
demands and are continuing their growth. The Scottish Government seems to be taking the
plight of town centres more seriously. There is an upsurge in farmers markets and other rather different spaces and formats as consumers and retailers adapt to the new realities. All these are likely to continue to develop in the coming year.
But against that come predictions of huge job losses and cuts in Scottish local government
and other public services across the country, the imposition and continuation of rates increases on especially large stores and general concern about the state of the economy and its outlook.
Consumer confidence is likely to remain very fragile and volatile. Yet, there might be something of a change in the air. Local retailing could be beginning to fill the vacuum in some towns and the excellent operators amongst the national retailers continue
to prosper and grow, though often online as much as in store.
There will be casualties to come, possibly some major ones, and the number of stores needed is likely to decline. But, there comes a point when sorting out the vacant spaces takes priority over complaining about them, and we may be getting to that point. After all, we cant be permanently doomed, can we?

TECHNOLOGY
Calum Paterson, managing partner, Scottish Equity Partners

Back in 2001, £200bn could have bought you the telecommunications company Vodafone
or, alternatively, ten of the UKs largest other FTSE 100 companies. Meanwhile, across the
pond, Priceline.com was valued at more than the entire US airlines industry. Subsequent
events confirmed the value being placed on dot.com and technology companies was not
justified.
More recently, technology company IPOs such as Facebook, Zynga and Groupon have
been compelling in terms of initial market capitalisations, but not the subsequent
performance of their shares. So, is history about to repeat itself with the bursting of another
technology bubble?
In a word, no. Although we are seeing some high valuations, they are more likely to be
supported by substantial earnings, hinging less on over-hyped expectations of future growth.
Looking ahead, there are exciting developments across the technology spectrum.
In 2013, smart phones and tablets will go mainstream, outstripping traditional PCs in the
home and increasingly in enterprise. Internet usage will continue to grow exponentially and
new business models such as cloud computing will take a greater hold. More houses will be
built eco-efficiently, using alternative energy sources like solar power. And, as well as helping us in the office, technology will increasingly help us in our cars and on the road but thankfully not driving us anywhere just yet.
In Scotland, there are reasons for optimism. Generating more economic benefits from the
pioneering research in our universities needs greater collaboration with business, but some
technology companies are showing great potential. In our own portfolio, for example,
Skyscanner is one of the worlds fastest growing travel companies, Sumerian has developed
market-leading analytics and Aridhia is a global pioneer in healthcare informatics.
Meanwhile, many of Scotland's larger, world-class companies such as SSE, Wood Group and Stagecoach Group may not be technology companies in the conventional sense, but
they are great innovators, using technology increasingly to fuel their growth.

ECONOMY
Dougie Adams, senior economic adviser, Ernst & Young ITEM Club

Words and phrases such as challenging, disappointing and unexpectedly poor are
likely to feature heavily in any retrospective examinations of 2012. The worst case
scenario the implosion of the Eurozone was averted, but plenty of other things
went awry.
World trade has stagnated, growing by a meagre 2.5 per cent and pushing overall
world growth down to around two per cent; bad news for struggling western economies
in the midst of rebalancing, including the UK. The culprits are easily identified: the
Eurozone crisis; a sharp slowdown in China; a lacklustre US recovery; and rising oil prices
during the middle of the year all played a part. The outlook for Scotland and the rest
of the UK hangs critically on how these international trends play out.
In the short term, the US needs to avoid dropping off a fiscal cliff and Euro
policymakers have to deliver on the promise made to do whatever it takes to save the
single currency. The long-term prospects of our key European markets currently
look poor, while those in the rapid growth markets have dimmed since this time last
year.
Looking to the positives, banks have paid down their borrowing from both their
overseas counterparts and the Bank of England and are now in a position to use
the strong inflows of savings deposits to boost lending to the private sector. T his
nullifies one of the headwinds facing the economy, but it remains to be seen
whether good-quality borrowers have the confidence to take advantage of better
access to finance.
A slight improvement can be expected in 2013, although Scottish growth is likely
to remain behind the UK as a whole. The employment market remains a concern,
with marginal increases unlikely to make a significant dent in unemployment figures
north of the border.

OIL AND GAS
Jennifer Young, chairman, Ledingham Chalmers LLP

There has been significant media attention on the future energy supply requirement of
the UK, with talk of shortages and potential dimming of the lights in homes across the
country yet the energy sector remains on a steady course in the North Sea.
While companies face an element of pressure in terms of access to cash for
investment, with banks continuing to hold the purse strings tightly, the North Sea continues
to perform well, with only a little over half its resource having been exploited to date.
Activity levels in exploration and production, and service company activity,
are consistent with what we had predicted for 2012, and look set to increase following
government confirmation of the Brown Field Allowance, which will promote investment
and sustain production from mature fields as well as postponing decommissioning of many
fields by a number of years.
Safety priorities continue to guide the industry and significant investment is being
made in programmes of inspection, repair and maintenance work across the industry,
ensuring ongoing work for service companies across the sector. Similarly, safety awareness
and training continues to be a key feature, which brings opportunities for professional
advisors.
Increasing investor confidence has and will continue to stimulate deal activity, ranging
from discrete farm-ins and asset sales to larger multi-asset and portfolio sales.
Stakeholdings in the North Sea are changing fast, with large multi-nationals
being replaced by smaller independent companies and an increased appetite for
investment from Japanese, Chinese and Korean companies reflective of their
changing status on the world stage.

SMEs
Sandy Manson, chief executive, Johnston Carmichael

Looking ahead at the prospects for the SME sector in Scotland for the coming year
deja-vu immediately comes to mind. A year ago we had hoped to see a more settled and
stable global and European financial scene which would help restore some semblance
of order to the financial markets and allow confidence to start rebuilding. Sadly a year on
and not a lot has changed.
However, I believe we are at least now slowly heading in a more positive direction
with the economic background music around the globe showing flickering signs of
improvement in recent weeks though we are certainly not out of the woods yet.
Since the financial crisis of 2008, SME Scotland has had to adjust to the new world
and that world is tough indeed, especially in certain key sectors such as construction
and retail. Gaining access to much needed funding to allow businesses to both expand
and keep trading through the downturn remains a challenge although the early signs
are that the Funds for Lending scheme recently announced by the government could
finally provide some tangible assistance. I am encouraged not only by the sounds but also
by the actions I see coming from some banks.
The role of private equity, high net worth angel investors and other financial institutions
in helping fund expansion plans for SMEs will equally continue to be increasingly key in the
year ahead and funds such as the Business Growth Fund and the Scottish Loan Fund will
only give ambitious businesses more options.
The SME sector in Scotland has taken a lot of knocks in recent years but it is still very
much alive and kicking because on the whole it is lean, commercial and responsive to the
relentless market pressures. It will however take a more confident consumer and a more
stable global economic backdrop to really get things going and all the headlines of
quantitative easing mean little to the SME sector who really are at the coal face of the
real economy.
Overall I believe it will remain a challenging year for much of the SME sector. However,
I do believe the sector will continue to remain resilient and individual businesses
will continue to do whatever is necessary to ensure they are put on a sustainable footing
until the recovery eventually gets under way.
It is encouraging though to see just how many Scottish SMEs arent waiting for the
recovery but are already delivering a growth and development strategy to enable them to
retain and win new markets.


FOOD AND DRINK
Jamie Withers, chief executive, Scotland Food & Drink

Food and drink is Scotlands best performing sector just now and the fastest growing
export sector. There is a momentum behind the industry and, whilst there remain very
real challenges on the ground for individual businesses, the industry moves into 2013 with
optimism.
Next year, the global footprint of Scottish produce can continue to grow. Our core
international customers the Eurozone and US will broaden in their scope to start embracing
fully the opportunities in Asia in particular.
Domestically, the countdown to 2014 is truly on. As the eyes of the world turn to Scotland
for the Ryder Cup, Commonwealth Games & Year of Homecoming, what an opportunity to
showcase Scotland as a land of food and drink.
However, the foundations for success will be laid in 2013. Careful planning will secure
a culinary success in 2014 and a legacy of opportunity for Scotlands food and drink
producers.

FINANCIAL SERVICES
Ian Steele, senior partner in Scotland and Northern Ireland, Deloitte

Its now four years since the initial onslaught of the financial crisis and the global recovery
continues to be patchy. Management remains focused on hard choices about cost control,
which business lines to pursue or exit, and convincing policymakers and the wider public
that financial institutions are forces for good.
That said, it is not all doom and gloom and the industry continues, as always, to evolve.
A succession of negative publicity in recent months means banks need to work hard to
reverse the reputational damage to face the challenge of new entrants or more traditional
lenders taking market share. The regulatory change agenda is daunting, together with
political pressure to lend to small businesses and use the banks as agents of recovery.
T he challenging economic environment will continue to make life difficult for insurers, along
with forces of nature and demographic trends beyond their control. The regulatory horizon is
forbidding and the introduction of the Retail Distribution Review will fundamentally alter the
way insurers distribute their products. Those well-positioned for pensions reform and autoenrolment could lead to an influx of new funds.
Asset managers will benefit from any uptick in the economy and remain profitable as costs
appear to be under control but new investment opportunities remain weak.
It remains too early to gauge the full impact of the new UK supervisory structure, but its
clear that innovative firms will continue to benefit from investment in customer analytics,
the digital agenda and the re-engineering of core processes.
One thing is for sure: 2013 will be far from a quiet year.


TOURISM
Professor J John Lennon, director, Moffat Centre for Travel and Tourism, Glasgow Caledonian University

Looking forward there is no doubt 2012 will be a tough year to follow. The UK was thrust onto the centre of the world stage with the landmark events of the Queens Diamond Jubilee and the London Olympics. In addition, the Year of Creative Scotland and the release of the Disney-Pixar film Brave kept the profile of Scotland highly visible during another difficult year for the global economy.
There is little doubt that if London 2012 did not succeed in filling hotel rooms and attracting
tourists to the UK, it did create a tremendous global advertisement for many parts of the
nation and Scotland, with its distinctive profile, will have benefited.
Joint marketing with Disney-Pixar by VisitScotland served to build further awareness
across the US and internationally on a scale national tourism marketing budgets could
simply not achieve. Yet, these potential returns many of which will be medium term
over the next three to five years have to be seen against a very challenging economic
environment.
In terms of domestic tourism, as further reductions in government spending from both
Edinburgh and London continue the prospects for 2013 will be impacted. The staycation will
become an increasingly common feature of Scottish and English tourism, particularly in the
family market. Self-catering and holiday parks should continue to benefit from this trend.
Outbound tourism will continue to face mixed fortunes at best. Despite the possibility
of another wet Scottish summer, sun-seeking Scots are unlikely to head for favourite overseas markets in large numbers given the unsettled economy and employment uncertainty in a number of sectors.
The 2012 problems faced by TUI and Thompson will continue in 2013 and turmoil
in Greece and the Middle East will reduce international holiday options for some.
Outbound travel from Scotland and the rest of the UK will be characterised by last-minute
decisions made on the basis of discounted offers increasingly sold online.
The Natural Scotland theme and the profile given to rural areas will hopefully encourage
UK tourists to explore more of the Scottish countryside and Highlands and Islands, though
this has to be tempered by growing oil and transport costs which will restrain travel.
The polarisation of demand continues with budget and luxury operators performing better
and those left in the mid-market struggling to build recognition and returns.
Scotland remains at the mercy of Sterling-Euro-Dollar exchange rates, which will affect
value propositions in key tourism-generating nations. In addition, difficulties in many western
European economies and erratic recovery in the US will also impact on international visitation.
However, the increased profile of the UK on the world stage in 2012 and the growth of demand from BRIC countries which is beginning to be felt in Scotland will continue to help
international demand.
The marketing proposition of Natural Scotland and the coverage and distribution of
imagery and campaigns for 2014 will build on established market presence and should help
to counterbalance the prevailing economic gloom. Once again, those providing quality
in food, attractions and accommodation are likely to perform better, though the market for
budget provision will remain strong.
In summary, tough market conditions at home and overseas will continue. Tourism
businesses will have to be creative, examine productivity and focus on quality to drive
returns in the 2013 market place.


PUBLIC SECTOR
Lindsay Gardiner, regional leader, PwC in Scotland

At the water coolers, coffee urns and canteen queues of Scotland, everyone's an
economist, sharing first-hand experience of the economic crisis and second-hand tales of
fiscal misfortune.
While today's short-term forecasts make bigger headlines, its Scotland's relatively
strong economic baseline that will dictate our medium to long-term prospects.
After London and the south east, Scotland is one of the best performing of the 12 UK
regions, where private sector productivity in manufacturing, construction and agriculture
are all significantly above the UK average.
And Scotland spends over 75 per cent more per head of population than the north-east
England on economic development. Admittedly, spending on the economy
doesn't automatically translate into GDP growth, but infrastructure investment counts
and the Scottish Government's move to prioritise capital investment in infrastructure,
make use of new funding models and act as a strategic investor in key sectors will have a
positive impact.
The Scotland's Digital Future document, for example, says investing in a broadband
infrastructure will potentially deliver 15,000 highly paid jobs over the next 15 years. In the
current climate, delivering an average of 1,000 new jobs a year is not to be sneezed at.
PwCs Northern Lights: One Year On report says Aberdeen needs 120,000 new skilled
workers by 2020, further adding a long-term commitment to develop infrastructure and
indigenous advantages such as oil and gas, manufacturing and financial services.
Not only does the underlying competitiveness of Scotlands private sector
hint at steady growth when recovery comes, this rebalancing of the economy towards
modern and outward-looking industries will help offset the impact of public sector cuts,
where austerity is already the new normal.
As council leaders anticipate further painful cuts into the next spending review period,
identifying further savings while protecting frontline services will dominate that agenda,
as will hard choices of how long Scotland can continue to provide a broad range of services
from transport to student support at no cost to citizens.
Making hard choices that determine economic prosperity means Scottish
Government and council leaders must communicate effectively and imaginatively
with individuals and communities on Scottish finance and spending finances and how this
new normal impacts services, citizens and their shared future.
The Scottish people are resilient and, if inspired, informed and challenged, will
embrace change that offers a prosperous, long-term future for their families. However,
if they dont understand the scale of the problem, they will be less likely to embrace
the difficult choices that will solve it.
And that, for Scotland, is the real challenge.


MEDIA
Neil Blain, head of department, Film, Media and Journalism, University of Stirling

In the latter stages of 2012, UK marketers were cutting their budgets to
all media with the exception of internet advertising, which steadily grew. Therein
lies more confirmation for newspapers, commercial TV and the advertising
industry of the digital future.
STV s half-yearly results in 2012, with digital and production revenues up but
broadcasting affected by the impact of wider economic conditions on TV
advertising, sum up the continuing trend affecting advertising revenue for as long
as the economy flatlines.
It isnt advertising problems in particular which explain the continuing
decline in Scotsman and Herald circulations, and short of reinvestment
in quality for which no obvious source exists the future looks happy for neither
paper nor its Sunday offerings.
Given continuing jobs cuts at BBC Scotland into 2013 and beyond, the
platform for public discussion of the issues ahead of 2014s referendum looks
to be shrinking, even if the circulations of Aberdeen's Press and Journal and
Dundee's Courier look more viable.
The resources available to London-produced newspapers will sustain their
competitiveness in Scotland, though circulations fall there, too. The BBC cuts
will have employment and infrastructure effects in northern Scotland, and the state
of the media will figure as part of the independence debate.
Meanwhile, despite a rogue Scottish Government report in 2012 claiming the
Scottish games industry doesn't exist, in the real world the games, software and
electronic publishing sector are major employment providers, will remain a
vital future growth area and still need strategic address by government.


DEALMAKING
Craig Anderson, senior partner in Scotland, KPMG

The ongoing issues in the Eurozone will continue to impact negatively on the UK
economy, which, in turn, will impact negatively upon the UK dealmaking communities, both in terms of appetite and opportunity.
Deals in the Scottish market, or those involving Scottish companies, are likely
to be dominated by the energy sector, which remains largely insulated from the
wider UK and global economic pressures.
At the same time, interest is still relatively strong among trade buyers in other sectors,
both domestically and internationally, for low-geared businesses which continue to
experience good trading.
As in recent years, those businesses which have a greater presence internationally,
particularly those involved in the energy sectors of regions such as Brazil, the Middle
East and Far East, will be best placed to exploit the opportunities available.
In terms of financing transactions we expect to see continued interest in Scotlands oil and
gas businesses from private equity investors while in other sectors, despite the continued
constraints on bank lending, funding will be made available for the more robust deals.
However, while many private equity firms have money to invest, their ability to pay the
top price will remain constrained by the banks more prudent lending parameters.
And the age-old problem of the gap between buyer and seller price expectations
is still apparent, although there may be suggestions the gap is shrinking as more
realism creeps in.

LIFE SCIENCES
Scott Johnstone, CEO, Scottish Life Sciences Association

2013 wil be another exciting year for the sector in Scotland. We aim to build on the
success of 2012 in terms of investment and company growth.
One of the key changes seen in 2012 was the interest from investors. A priority for
the SLA is to attract more interest in from private sector investors, so we are delighted
to have 12 investor members, ranging from local business angel groups to US-based
funds, including global fund Morningside Ventures. All are actively investing in
Scotland and there are a healthy number of deals scheduled to complete in Q4 2012
and early 2013.
Another top priority for the SLA is increased engagement of life science
companies in Scotland with the NHS. Following early work on the Medtech Roadmap to help SMEs engage, the SLA is working with the Scottish Government and
the NHS to give companies the opportunity to develop products with the help of NHS
expertise, which will benefit of patients and the companies involved. This NHS/business
partnership has never been stronger, and we very much look forward to the start of
the Health Innovation Partnerships early in 2013 as part of the governments policy to
further strengthen it.
Finally, we have witnessed a significant new development in the Scottish academic
sector with the introduction of Easy Access IP across all the academic institutions in
2012. The SLA supported this development from its inception, and Easy Access IP
has already led to several new deals for Glasgow University, where the concept
was developed. We are expecting this to lead to more commercially productive
collaboration between industry and academia leading to higher rates of
business R&D in Scotland.
The formation of an integrated Knowledge Exchange Office in 2013
will further streamline the business engagement process for companies in
Scotland, making it industry led.