FAI Economic Commentary - June 2012

Our latest Economic Commentary, published on Wednesday is here.

In this issue we focus as usual on the current state of the Scottish economy, provide medium term forecasts for GDP, jobs and unemployment. In addition, in this edition we provide a model simulation of the breakdown of the euro and its impact on the Scottish economy. The latter will be the subject of the next post.

On the present state of the economy and forecasts the key points are:

• Growth in the Scottish economy appears to be weakening again after some survey evidence of a pickup in the first quarter of the year. A recovery comparison with the UK is in this chart:

  

• Considerable slack remains in the Scottish labour market, although the main indicators of unemployment, activity and employment rates have moved into line with the UK.
• It is now clear that the recovery in output stalled after mid-2010 and we believe that the evidence supports the views that UK government fiscal austerity programme is the main culprit and not weakened trade and investment through problems in the eurozone. This chart showing the demand components of Scottish growth provides some support for our view:

  

• Added to this are the effects of rising commodity price driven inflation on real incomes and consumption.
• Against this background we provide the following forecasts:
  • We have maintained our forecast of GDP growth for 2012 at 0.4% - see this post on the February Commentary.
  • But we expect growth to be a little weaker in 2013 at 1.5% instead of 1.7%.
  • By 2014 we predict a stronger recovery with growth of 2.5%.
  • We expect Scottish growth to remain close to UK growth in line with the evidence from the recovery to date.
  • For employment, our central forecast is for net jobs to fall by -0.7% in 2012, rising by 0.9% in 2013 and by 1.6% in 2014.
  • The number of employee jobs in Scotland is forecast to decline during 2012 by just less than 15,000 jobs. Through 2013 and 2014 we forecast increases in employee jobs in our central forecast, with annual increases of less than 20 thousand and more than 36 thousand respectively.
  • In 2012 there are significant net job losses in the service sector of -15,500 and more than 2,000 construction job losses.
  • In 2013 and 2014 there are job increases across all the main sectors.
  • A "rebalancing" of employment within the service sectors towards non-public activities as fiscal consolidation continues. Construction employment is forecast to increase in 2013 and 2014 as spending on (private) investment projects returns with renewed confidence in the recovery.
  • Unemployment is forecast to continue to rise on both key measures this year.
  • On the preferred ILO measure unemployment is predicted to reach 246,100 by the end of this year, or 9.3%.
  • The unemployment position now deteriorates further into 2013, with unemployment at the end of that year forecast to 252,400, or 9.5%, then falling to 238,200, or 9%, by the end of 2014.