Scottish Economy Watch

Scottish GDP improves

The latest Scottish GDP statistics, published today, for the fourth quarter of 2012, are on the face of it quite encouraging, especially when compared to UK.

The bald statistics show that GDP rose by 0.5% in Scotland in the quarter, while falling by -0.3% in the UK. However, growth in 2012 - calendar year - was at 0.3% identical in both Scotland and the UK.

The position of Scotland and the UK in terms of the recovery of GDP from recession is shown in the chart below.

Scottish GDP stands at -2.4% below its pre-recession peak, slightly better than the position of UK GDP, which is -2.9% below its pre-recession peak. So, still a long way to go before the economy gets back to where it was, in GDP terms in early 2008.

There are two key factors that are complicating the assessment of the GDP performance of Scotland and the UK, both absolutely and relatively, during 2012. The first is the differential impact of the London Olympics. The second is the consequences of declining oil and gas production.

To a certain extent the weak performance of the UK economy in quarter four was a reflection of the temporary boost given to GDP by the Olympics in quarter three. If we look at the growth in GDP between quarters two and four in Scotland and the UK, we see that Scottish GDP rose by 0.8% while UK GDP rose by 0.6%. So, when we smooth out the effect of the Olympics the performance of Scotland and the UK is much closer.

But then there is the complicating factor of oil and gas production which - offshore production - is included in the UK GDP data but not in the Scottish data. Removing oil and gas production gives us the following chart.

Now once declining oil and gas production is removed, which incidentally would have lowered measured GDP growth in an independent Scotland, we find that both Scotland and the UK grew by 0.8% between the second and fourth quarter. Scottish and UK growth is identical.

Once that is done, we see that UK GDP is -1.9% below its pre-recession peak compared to -2.4% for Scotland. So, we can conclude that the recovery continues to be weak in the UK and a little weaker still overall in Scotland.

One hope of the UK Government and many commentators is that the UK economy will recover from the Great Recession by re-balancing away from domestic demand to external or foreign demand, from consumption to investment, and from public to private production. A key factor in this is the desired shift in favour of manufacturing, which is a major exporter. The latest data show that very little progress is being made here as the next chart shows.

However, it is some small comfort that Scottish manufacturing is doing better than UK manufacturing. But the downturn in the fourth quarter in Scottish manufacturing as well as in UK manufacturing takes some of the shine off the good overall Scottish GDP performance in the fourth quarter.

Financial hotspots

Today the Herald contains a piece drawing on a report compiled by commercial think-tank Z/Yen - a tank of thinkers that has not crossed my doorstep before. The report according to the Herald reveals that:

GLASGOW has overtaken Edinburgh as Scotland's most important financial centre in the latest ranking of the world's economic hotspots. The biannual Global Financial Centres Index shows that Glasgow dropped 11 places to 50, but was still ahead of Madrid, Beijing and Bangkok. However, the Scottish capital slumped even further, down 17 spots to 54 in the list, a reflection of the turmoil that has swept through the Scottish banking centre in recent years

No information is given as the importance of each financial centre is measured and the criteria against which each are ranked, the source of the information and how statistically robust the data are.

There is no doubt that perceptions are important. But one test of the importance of a financial centre is the size of its contribution to output or value added and perhaps jobs. Value added does capture quality but the number of jobs less so.

The ONS produces sub-regional gross value added (GVA) data. In the latest release in December, the scale of finance and insurance activities in Glasgow and Edinburgh is readily identifiable. The chart below reveals the situation in 2010

That makes Edinburgh financial services more than 254% (2.5 times) larger than the GVA produced in the sector in Glasgow.

In jobs terms, financial and professional services employed 50,500 in Edinburgh and 37,500 in Glasgow.

Now clearly, these data are a little out of date but I find it difficult to believe that output and jobs have changed so rapidly in the last 18 months or two years to reverse the position in Glasgow relative to Edinburgh.

Neither city should be complacent in terms of perceptions of their international standing in financial services. And clearly, if perceptions turn against Edinburgh and Glasgow so that business is lost then value added and jobs will eventually fall.

But we should beware the declarations of commercial think tanks that do not publish the detailed data underpinnings of their so-called findings.

As Pa Entwhistle, and some say 'Oor Wullie's grandpa, used to say:

"Daft I call it!"

Where have all the new firms gone?

 Personal note: For anyone who might have noticed I haven't blogged much in the last month. This has been largely due to a vicious viral infection, which has laid me low for the past few weeks. I am now back at my desk, if still slightly groggy. Hopefully, I can start to produce more blogs but probably not until after a week away on Mull next week!

While in my bed, new business statistics from the Committee of Scottish Clearing Bankers were published for the fourth quarter 2012. As I noted in earlier posts e.g. here, this series records new business start-ups based in Scotland that have opened accounts with any of the four Scottish Clearing Banks. It is a valuable series because it should be expected that the creation of new firms would move in line with overall economic performance and GDP in particular.

The latest data show a drop again in new business formation between the third and fourth quarters with the number of new starts falling by 375 from 3,091to 2716. But as explained before the CSCB data are not seasonally adjusted, so I have constructed a four-quarter moving average, which smoothes out some of the seasonality and other short-term fluctuations. The updated chart is here

At a time when there is much concern about both lack of demand and weakness in the supply capacity of the UK and Scottish economies, these data are a clear cause for concern.

In the latest data, the number of starts is 47 percent below the (smoothed) pre-recession peak compared to 45 percent in the third quarter. Alternatively, the latest numbers are 35 percent below the average quarterly starts in the period before the recession started, compared to 33 percent in the third quarter.

It is possible that Scottish new starts are creating bank accounts with non-Scottish Clearing Bankers. But that seems unlikely.

It is more likely that the data reflect:

• a continuing lack of demand for goods and services which is discouraging new starts;
• the failure of the banks to lend to new starts because of increased risk aversion on the part of the Scottish banks compared to the period before the recession.

An examination of the industrial pattern of new starts offers more information Between 2011 and 2012 the number of new businesses fell by 881 from 14,737 to 13,856. The industrial distribution of that change between 2011 and 2012 is shown in the chart below.

The chart makes clear that the weakest sectors in terms of new business creation were in property related activities and business services, construction, wholesale and retail activities, and in other financial intermediation. In some ways that maps what has been happening to output across the Scottish economy.

In contrast, it is good to see a pick-up in manufacturing new starts, which again reflects what has been happening to output. There would also appear to be some growth in small businesses serving the public sector and insurance and pensions sectors, which may reflect the evidence of a shift away from full-time employment to self-employment.

Overall, the new business data appear to confirm a picture of an economy still suffering from a lack of demand with a hangover from the property and finance boom and bust that preceded the loss of output and jobs in the Great Recession.

Latest FAI Economic Commentary

The latest Fraser of Allander Institute Economic Commentary, sponsored by PricewaterhouseCoopers LLP is available here.

There is much in the Commentary including signed pieces by researchers outside the Commentary team e.g. Iain Inglis, and Kenny Richmond from Scottish Enterprise on The technology company development journey – from concept to commercialisation, and David N.F. Bell, University of Stirling Alasdair G. Rutherford, University of Stirling,Robert E. Wright University of Strathclyde on Free Personal Care for Older People: A Wider Perspective on Its Costs.

A brief summary of the Outlook and Appraisal and forecasts follows:

The Institute notes that there was evidence of some genuine growth in the Scottish economy in the third quarter of last year. Also the new GDP methodology and revisions have meant the fit with the UK economy during recession and recovery is closer. The recovery has been a little stronger than the earlier data suggested but still a little weaker than the UK as a whole. But survey evidence suggests a weakening in the final quarter of 2012 and uncertain prospects for 2013.

It is quite clear the main components of aggregate demand in the Scottish economy remain weak.

Household demand growth is weak, due to

• Falling real incomes as inflation above earnings growth of 2%.
• Employment is falling again and number of hours worked is very low.
• The housing market is flat with no growth in house prices offering no boost to household wealth and increased spending.
• The Scottish household saving rate is high and rising; at 11.1% it is 3.4 percentage points higher than in the UK.

Investment spending is falling both absolutely and relative to GDP - see chart below drawing on latest (28 February publication) Scottish National Accounts Project (SNAP) data

After improving during the recession our relative export performance has deteriorated since 2011 with negative contribution to growth - see next chart drawing on SNAP data

The prospects for a growth in the contribution of net trade depend in the short term:

• On the recovery of demand and output in the eurozone from the current recession and wider growth of world trade.
• Huge uncertainties exist over eurozone prospects.
• The main beacon of hope is recovery in the US economy but this is not without its uncertainties.
• But also price issues as well as demand:
  • The effect of sterling devaluation
  • The intrinsic competitiveness of Scottish companies – more significant for long-term growth

Government fiscal consolidation is set to increase as the UK Government strives to meets its target of balance in its structural (cyclically adjusted) current budget in five years. Most of the future adjustments concern spending rather than taxation with 68% of planned benefit cuts and 78% of current departmental spending cuts still to come after April this year. These cuts will depress household demand as well as reducing government spending directly.

The labour market in Scotland shows falling measured unemployment but from the middle of last year employment is falling and the number inactive continues to rise. The 'real' level of unemployment is clearly higher and that will contribute to weak household spending on goods and services.

Other Issues

• Quite clear that austerity has reduced growth.
• Weak UK export performance is also a factor in a failure to recover strongly.
• Lack of bank lending is still constraining, especially for small businesses.
• Loss of AAA credit rating will make no difference to UK borrowing costs and ability to borrow.
• Little threat from inflation, indeed inflation will be allowed to go higher and sterling lower to help recovery.

Forecasts

• GDP growth is now forecast to be 0.9% in 2013 and 1.7% in 2014, a lowering of the Institute's forecast in November, rising further to 1.9% in 2015.
• Projected net job creation is 9,400 this year, rising to 19,150 in 2014 and 31,800 in 2015.
• Unemployment is now forecast to be 218,300 by the end of 2013 and 228,500 in 2014. By the end of 2015 unemployment is forecast to have fallen back to 204,100 as the economy recovers more strongly.

 

A Developing Taste for Scottish Goods?

Today's manufactured export figures are welcome. They show a rise in volumes of 0.8% in July - September last year over the second quarter performance. Over the year to the third quarter real exports nevertheless fell by -0.8%.

I was, therefore, a little surprised to read these comments from Finance Secretary John Swinney on the latest figures

" ... it is clear that many counties have developed a taste for Scottish goods ... Our excellent natural larder guarantees some of the best produce in the world and this reputation for quality is paying dividends."

The chart below shows just where Scottish manufactured exports are.

This statement from the Release is formally correct:

The index of manufactured exports fell more than 13 per cent during the recession in 2008/9. Since then the trend in the results shows a recovery in export volumes, although the quarterly growth rates have been relatively volatile. The latest results show that export volumes remain around 10 per cent below their pre-recession level.

But the statement does not tell the full story.

Manufactured export volumes were falling before the GDP recession began - from 2007Q2. They then fell by 16.5% and began to pick up a quarter before the end of the GDP recession. With the latest data, export volumes, now stand at 13% below the 2007 peak. Yes, there has been a recovery but it has been weak and appeared to have run out of steam from 2011Q2.

Moreover, it can be seen that the present situation is worse than the position in the early 2000s after the shock to Scotland's manufacturing exports of the collapse of the electronics industry. Although, in mitigation the downturn then was structural affecting mainly one sector, whereas today the malaise is more general.

We do need to be grateful to the export performance of the food and drinks industry and whisky in particular. The data show that without growth of 5.9% in food and drink during the quarter, manufacturing exports would have contracted by nearly 1%. The position is a little better over the year with engineering making a small positive contribution along with food and drink. But the weak performance of the other sectors resulted in negative growth over all.

Some recovery; some dividend!

Our Recovery Just Got Better!

The latest Scottish GDP data for the third quarter of last year, which were published this morning, provide interesting reading.

The data are interesting for much more than what they tell us about the performance of the Scottish economy in the latest quarter. Improvements to the underlying statistical methodology and source data have changed the whole profile of Scotland's recovery from the Great Recession both absolutely and relative to the UK.

First, the release shows that the Scottish economy grew by 0.6% in the third quarter, compared to growth of 0.9% in the UK. This is a commendable Scottish performance. It is commendable because the so-called 'Olympic bounce' was expected, is likely to have been, much weaker here than in the UK. So, you might say that the 0.6% figure represents genuine growth in Scotland whereas the 0.9% UK figure has a good element of 'flash in the pan'.

Beneath the aggregate figures the Scottish data showed that manufacturing turned in a strong performance with growth of 3% in the quarter and 0.6% over the year. This can be compared with the performance of UK manufacturing which grew by only 0.7% in the quarter and contracted by -1.5% over the year. Similarly, construction also performed better here, in so far as the sector contracted by less here! Scottish construction GVA fell by -0.4% in the quarter and -7.1% over the year - a scary number. But UK construction contracted by -2.5% in the quarter and -11.2% over the year - even more scary!

However, the important services sector, which accounts for 72% of Scottish GDP and 77% of UK GDP, was weaker in Scotland in the third quarter. Scottish service GVA grew by 0.3% here compared to growth of 1.2% in the UK. But over the year the service sector in Scotland grew by 1.3%, identical to UK service sector growth.

The performance of Government services still looks anomalous in the UK with GVA continuing to expand by 1.6% in the quarter and 2.8% over the year. Government and other services in Scotland, more realistically, contracted by -0.1% in the quarter and rose by 0.1% over the year.

But what is perhaps more interesting than the third quarter results is the effect of methodology and data source revision on the nature and profile of Scotland's recovery from recession.

The Release states that

This publication incorporates a number of updates to methodology and source data. This is the first Scottish GDP publication fully based on the Standard Industrial Classification (SIC) 2007, which is a major revision to the previous SIC 2003. As part of this process, annual GVA weights since 1998 for each industry have been updated following their estimation in a SIC 2007 based Supply-Use framework. The most recent annual GVA weights now relate to 2009, updated from 2007 in the previous publication. This update means that the latest estimates better reflect the current structure of the Scottish economy.

It also means that there is a more accurate like-for-like comparison with the UK.

The effect on Scotland's recovery from recession is marked.

The last quarter data looked like this

But in today's data for the 3rd quarter, after revisions and adoption of the latest industry weights to be directly comparable with the UK, we get this chart

The three quarters of negative growth to the second quarter evident in the previous release have now reduced to two. The scale of the Great Recession is slightly reduced to a drop of -5.6% rather than-5.8%. And now Scotland stands with the UK in being just under 3% below the pre-recession peak, whereas in the previous quarter Scotland was more adrift from the UK.

The Scottish recovery is still slightly weaker than the UK but not by much.

Hey, our recovery just got better!

(A more detailed analysis of the Scottish GDP data and the wider context will be provided in the Fraser of Allander Institute's Economic Commentary to be published in early March.)

Public sector jobs and fiscal austerity: update

Yesterday's publication of data on public sector jobs in Scotland for the third quarter of this year, enables me to update earlier posts on public sector jobs and fiscal austerity: here and here.

The latest data show there were 581,300 people employed in the public sector in Scotland in Q3 2012. That amounts to 23.5 percent of total employment and 22.3 percent if one excludes the public sector financial institutions that the state took a majority stake in during the financial crisis.

It is worth noting that the share of total employment accounted for by the public sector is now less than in Q3 1999 when 23.8 percent of total jobs were in the public sector.

The public sector has been shedding jobs since 2009-2010 when fiscal austerity began in earnest.

The track of jobs in total and in public and private sector is presented in the following chart:

The chart smoothes the data using a four-quarter moving average because the published data are not seasonally adjusted. What the chart shows is that around 7 percent of public sector jobs have been lost since either the pre-recession economy peak, or (in brackets in the chart) since the previous public sector employment peak. The figure for FTE jobs is similar. This amounts to 44,000 jobs lost using the smoothed series or 52,000 jobs from the actual data (I have excluded the banks and put them back in the private sector).

What has been the effect on the Scottish economy as a whole?

If we ignore possible multiplier, or knock-on, spending effects of the public sector job loss, and wages and price effects of the job loss, we can say that if public sector employment had remained unchanged at its peak then total employment would have followed the purple line in the graph. That is, by Q3 2012 total jobs would have been -1.6 percent below the pre-recession peak compared to -3.4 percent below.

So, if this calculation is anywhere near correct, the effect of the fiscal consolidation in departmental and local authority job losses alone - excluding cuts in spending in addition to jobs and tax rises - has not been trivial. The recession would have been little different but the recovery would have been stronger.

There is no evidence here that public job losses have led to much, if any, private sector job creation as resources have been freed up. This is because the economy has laboured under a prolonged deficiency of aggregate demand and has not been constrained by supply.

And sadly, the cuts themselves will have contributed to that deficiency of demand.

Recovery needs more demand not free trade

In today's Scotsman Michael Moore, Secretary of State for Scotland is reported to have said in a speech to US business leaders that free trade between the UK and the US is essential to economic recovery and prosperity in both countries.

This is incorrect.

It is also a diversion from the real reason holding back recovery: a lack of demand. And a lack of demand worsened by the UK coalition government's fiscal austerity policy.

This not to argue against free trade, which can lead to improved economic efficiency if trade barriers are reduced and removed. But as Paul Krugman notes in this recent post, the costs of current levels of protectionism pale in significance against the resource waste of high levels of unemployment and output much below capacity.

Research by K. Bhattarai (2001) in this paper found that gains from moving to global free trade were 1.3 percent of global GDP. For the UK, gains were about £7 billion in 1995 prices or, by my calculation, just below 1 percent of GDP. And this is from global not bilateral free trade.

So, clearly the gains from a bilateral removal of trade restriction between the US and UK would be small compared to an estimated UK output gap averaging - OBR page 38 and 39 - just under 3 percent of GDP.

Moreover, Krugman rightly points out that one shouldn't view the removal of trade barriers as a job creation tool. The reason is that while getting rid of trade restrictions should raise trade, imports will rise as well as exports. In Krugman's words

There is no reason at all to assume that the jobs gained from export creation would exceed the jobs lost to import competition.

        Globalization is not the answer to the Lesser Depression.

New business data: no buzz here

New business statistics from the Committee of Scottish Clearing Bankers were published today for the third quarter 2012. As I noted in previous posts this series records new business start-ups based in Scotland that have opened accounts with any of the four Scottish Clearing Banks. It is a valuable series because it should be expected that the creation of new firms would move in line with overall economic performance and GDP in particular.

The data show a drop in new business formation between the second and third quarters with the number of new starts falling by 593 from 3,684 to 3,091. But the CSCB data are not seasonally adjusted, so I have constructed a four-quarter moving average, which smoothes out some of the seasonality and other short-term fluctuations. The updated chart is here

There continues to be no evidence of a recovery.

Using the moving average series, which smoothes the non-seasonally adjusted actual data, the number of starts is 45 percent below the pre-recession peak compared to 44 percent in the second quarter. Alternatively, the latest numbers are 33 percent below the average quarterly starts in the period before the recession started, compared to 31 percent in the second quarter.

No evidence of entrepreneurial buzz in these data.

 

Scottish entrepreneurial buzz, or needs must?

There seems to be a buzz. A buzz that Scotland has become more entrepreneurial. We have the exciting new website published by my good friend Bill Jamieson, Scot-Buzz. On Friday, in the Scotsman, the imaginative nationalist columnist George Kerevan, in a very partial use of statistics to defend both Scottish government policy and the robustness of the Scottish labour market, asserted

In the year to March 2012, the number of enterprises in Scotland increased by a record 10 per cent – fully 30,835 new firms. Not only was this the biggest annual increase since 2000, the growth in new enterprises in Scotland happened at roughly double the rate for the UK as a whole. .... this is hardly indicative that Scotland was under-performing compared to the UK as a whole.

And George Kerevan is correct. The data he uses come from the latest Businesses in Scotland publication which was published on 7 November.

Unfortunately, I do not believe that these data are sufficient to draw the conclusion that we have a new entrepreneurial buzz in Scotland, or that the Scottish economy and labour market is doing very well thank you.

First, we need to say a few words about the data. The businesses that comprise the database are registered and unregistered businesses. The registered businesses are those that are registered for VAT and/or PAYE. The unregistered businesses relate, in the words of the relevant Scottish government web page

a substantial number of very small enterprises which have no employees and operate below the VAT threshold, and are therefore not included on the IDBR (which contains the registered businesses). A modelling procedure that combines data from the IDBR with data from the Annual Population Survey (annual version of the Labour Force Survey (LFS)), Family Resources Survey (FRS) and HMRC Self Assessment tax returns are used to estimate the number of unregistered enterprises.

So, this is not a simple count. There is a lot of estimation and to be blunt: educated guesswork in the series, which nevertheless does have the National Statistic kite mark.

This is how the data look when we separate out the registered and unregistered businesses

Yes, it is the unregistered businesses that are growing. The registered business numbers have been fairly stable over the first decade of 2000s. And the recent jump between 2011 and 2012 is in part to do with HMRC discovering more firms - see here page 2. The statisticians have tried to adjust the earlier numbers to be comparable but there must clearly be a health warning as to whether we are really making a like-for-like comparison with the earlier years of registered businesses.

Now, it is clearly the growth of the unregistered businesses that is interesting. These are the ones with no employees and which are sufficiently small to have a turnover less than the VAT threshold - currently £77,000 per annum - and are not registered for PAYE. Most of them will not have business bank accounts either - see below.

Over the period 2000 to 2012 their numbers have grown by more than 90,000 or 99 per cent. The number basically doubled. But there was something of an acceleration after 2006 with nearly 60,000, or two-thirds, of the rise occurring during the years of recession and limited economic recovery. An even rate of growth would have delivered about 45,000.

While there is now a large body of theory and evidence linking increased entrepreneurship to growth - see here and here - one would also expect a growing economy to raise business opportunities and hence stimulate entrepreneurship - see here.

But what we appear to see in Scotland is an apparent rise in entrepreneurship that has had no effect on growth to date. And this has occurred when the economy has been contracting and stagnating.

A reasonable person might conclude that these data do not indicate that there has been an increase in entrepreneurship of any sizable magnitude in Scotland.

This conclusion is supported by the Scottish clearing bank data on the opening of business bank accounts, which is taken as a one proxy for entrepreneurship. The latest data are shown in this chart

No suggestion of an entrepreneurial resurgence in these data.

So what has been happening?

The answer I think lies in the weakness of the Scottish economy coupled to structural and demographic changes in the labour market favouring part-time, multiple job holding and self employment as this post shows. And also a growing awareness that tax bills can be legally reduced by creating companies and paying corporation tax instead of income tax. But while the creators of the companies may have several different income streams from individuals' portfolio work, they have no employees and can't in truth be considered to be 'proper' businesses.

The chart below shows what has been happening to full-time employment in Scotland.

It has been falling since 2007 and is over 7 percent below its 2007-2008 peak compared around 3 per cent for total employment. Many of these full-time workers that lost their jobs will have gone into self-employment and there is a significant evidence base from across the world to support this "recession-push" hypothesis - of being pushed into self-employment but not necessarily entrepreneurship - for example see here, and here.

The latter study, by Dawson, Henley and Latreille (2009), which analysed the UK labour force survey between 1999 and 2001, did not find much support for the 'push' hypothesis but drew this interesting conclusion

Whether this conclusion would be as robust during the current period of severe economic downturn and rapidly rising unemployment is open to debate and, with suitable data, further future analysis. Indeed it would give cause for considerable concern if the proportion choosing self-employment because it represents the only alternative to economic inactivity was to rise significantly in the next few years. Such 'forced' choices may not lay solid foundations for well-resourced, successful new business ventures.

Indeed. And that appears to be what we are witnessing in Scotland.

Needs must, not entrepreneurial buzz.