Scottish economic growth continues to improve but doubts remain about a sustained recovery according to the latest Economic Commentary from the University of Strathclyde's Fraser of Allander Institute, sponsored by PricewaterhouseCoopers LLP. The improvement in growth is mainly dependent on growth in household spending. As a result, we have raised our forecasts for growth in 2013, from 0.9% to 1.3%, and in 2014, from 1.6% to 1.8%. Growth in 2015 is predicted to be 2.1%, roughly at trend.
However, we note that the main drivers of household spending remain weak. Spending is being supported by increased borrowing and reliance by some households on the growth of pawnbrokers, cash generators and pay-day loan operations on Scottish high streets. This combination provides an unlikely basis for a sustained recovery. A continued improvement in net exports and in physical investment spending would appear necessary for a durable recovery, particularly with the UK Government's programme of fiscal consolidation set to continue.
- The Scottish economy has grown for five successive quarters to the second quarter of this year. The UK has grown for three successive quarters to the third quarter of the year. And the growth rate has been rising as 2013 unfolds.
- The industry structure of the recovery differs between the UK and Scotland.
- The service sector is weaker in Scotland while growth in production and the manufacturing sector within it has been stronger in Scotland. However, construction sector growth has been quite similar between the two countries with recovery weak.
- Financial services appear to have experienced a structural decline since the beginning of the recession in both Scotland and the UK. This decline may be bottoming out but whether the sector will return to 2007 levels of output is a moot point.
- It is clear that a strong recovery is now taking place in the important business services sector in Scotland and the recovery is stronger than in the UK. The recovery and growth of real estate activities and transport, storage & communications in Scotland is weaker, while that in distribution is stronger.
- Despite recent strong job creation, Scottish jobs are now 0.8% below their pre-recession peak, which is worse than the UK, where the jobs total is 0.8% above the pre-recession peak.
- But Scotland's unemployment rate of 7.3% is lower than the UK's 7.7%.
- The employment population ratio is at -3% below pre-recession peak suggesting that there is still much spare capacity and labour reserves in the Scottish economy.
- Labour productivity in Scotland has improved relative to the UK, which has experienced a sharp drop in productivity.
- With a recovery in output and jobs now clearly occurring, the key question is whether it can be sustained over several quarters and even years.
Will the recovery be sustained?
- The improvement in growth is mainly dependent on growth in household spending. Investment continues to decline and net trade is erratic, although there was a positive contribution to growth in the first quarter.
- Yet, the main drivers of household spending remain weak: real wages are falling as pay fails to keep up with the rate of inflation; asset prices remain flat, especially housing in Scotland; share prices are rising but contribute little to spending ion Scotland due to low share ownership.
- So, what spending growth there is is being supported by increased borrowing.
- There appears also to be reliance by some households on the growth of pawnbrokers, cash generators and pay-day loan operations on Scottish high streets. This combination provides an unlikely basis for a sustained recovery.
- A continued improvement in net exports and in physical investment spending would appear necessary for a durable recovery, particularly with the UK Government's programme of fiscal consolidation set to continue.
- GDP growth is forecast to be 1.3% in 2013; an upward revision from our June and March forecast of 0.9%.
- For 2014 we have also revised up our forecast from the 1.6% predicted in June to 1.8%, while for 2015, we retain the same 2.1% prediction as in June.
- The forecasts for 2013 and 2014 are higher than in June because of better than expected outturn data on the growth of household spending and increasingly optimistic business surveys.
- However, we are still predicting below trend growth next year reflecting the continued relative weakness of domestic demand, in particular government spending and consumer expenditure, and only slowly rising growth in eurozone markets but stronger growth in the rest of UK.
- Projected net job creation is 21,200 in 2013, rising to 27,200 in 2014 and 38,400 in 2015. The majority of jobs created will be in the service sector. The unemployment forecast has been revised down again from June, reflecting higher employment given the growth of output. We are now seeing many workers re-entering the labour market as job prospects improve.
- The upshot is that unemployment may not fall as much as the job creation figures might suggest.
- Unemployment on the ILO measure at the end of 2013 is now projected to be 204,550 (7.6%). The unemployment position is again expected to deteriorate slightly in 2014 compared to 2013 due to relatively weak output and employment growth. Unemployment is now forecast to be 224,800 (8.4%) by the end of 2014 but then falls back to 186,450 (7.0%) by the end of 2015 as growth in the economy strengthens.