Scottish Economy Watch

Personal Debt, Spending and Recovery

It is difficult to know what to make of the latest data on household debt (financial liabilities, excluding mortgages) which were published by the ONS this week.

Media reporting of these data took some comfort, e.g. here, in the evidence that at £2,500 Scotland had, in 2008/10, the second lowest median of personal financial debt in the UK. Wales at £2,000 had the lowest, while the South East at £4,200 had the highest. Scotland, Wales, West Midlands and London were below the GB average of £3,200 - see chart below.

Why is it an apparent good thing that Scottish household debt is lower than the GB average and several other regions?

The answer is that high levels of household debt are considered to be a major factor in damaging consumer confidence and lowering household spending after the financial crisis and recession of 2008/09.

There is Bank of England survey evidence that concern about high levels of debt leads households to desire to cut spending. And the recent ONS data show that the percentage of individuals reporting financial debt as a burden has increased between the two waves of the survey i.e. 2006/08 and 2008/10. In 2006/08, 47.5% of individuals living in households in financial debt reported their debt as either a heavy burden or somewhat of a burden, compared with 49.4% of individuals in 2008/10; an increase of 1.9 percentage points.

So, can we conclude that because of the lower level of debt Scottish household spending while continuing to be restrained, should be less restrained than in Britain as a whole and in most other GB regions?

Possibly but not certainly!

Economists who believe the "Financial Instability Hypothesis", which was developed by the American economist Hyman Minsky, emphasise the rate of growth of debt as well as its level. Steve Keen, for example, suggests that

"the ratio of debt to GDP — and the rate of change of that ratio — as the key determinant of the state of the economy .."

Superficially, the argument is that the greater the acceleration the more heavily the brakes are likely to be applied. In the debt context, the faster the growth of debt the more rapidly spending will be cut back once the 'Minsky moment' is reached.

If the growth of debt is important, and we are talking hypotheses here, then what do the data show for Scotland in the recent ONS release? The chart is here

The growth in Scottish non-mortgage median household debt (19%) was faster than the average in Britain (14%) but less than some UK regions.

I'm not sure how significant this statistic is. But my main point is that we should not draw too much comfort from the evidence that the level of Scottish household debt is lower than GB and most other UK regions.

Should Scotland be in EU if rUK out?

In a speech to the British Irish Chamber of Commerce in Dublin last week Nicola Sturgeon, Deputy First Minister is reported to have said:

"It is no longer fanciful to consider as real the possibility the UK is heading out of the EU. Let me state emphatically this is not a journey the Scottish Government wishes Scotland to be a part of, nor one I believe would be supported across the Scottish business community or wider civic society."

I have no sympathy with what Prime Minister Cameron is seeking to do re a referendum in the UK on EU membership. But if, hypothetically, the UK did leave the EU is Nicola Sturgeon correct in arguing that it is in Scotland's interests to stay in the EU?

I do not think the issue is as clear-cut as she pretends.

Take trade for example. The following chart, constructed from the recently published Scotland Global Connections 2011 highlights the importance of trade with rest of UK compared to EU trade.

Scottish exports to rest of UK are four times bigger than exports to the EU (ex UK). Moreover, the importance of rest of UK exports to Scotland is rising while the share of exports to the EU has fallen over the period. And that is after a 15 percent increase in the nominal value of exports to the EU between 2010 and 2011, taking the share from a low of 15 per cent to 16 per cent.

Given these data it would appear to be exceptionally foolhardy of any Scottish government to risk trade, investment and migration links to the rest of UK by staying in the EU if the UK left.

On the other hand, foreign investment and skilled labour immigration to Scotland from the EU and other countries could be damaged if Scotland left the EU. And, the impact of Scotland in-rUK out on Scottish trade might be softened if a free trade arrangement was negotiated by rUK with the EU.

So, it is not at all clear that in such circumstances staying in the EU would be in the best interests of the Scottish people. It would be by no means an easy decision for a Scottish government - if independent - and it is rather remiss of Nicola Sturgeon to present it as such.

Jobs Market Weakens Again

The latest jobs market data provided further evidence that the labour market in Scotland continues to weaken. The positive element in the latest figures was a strong fall in unemployment of 14,000 or -6.4%. In the UK, unemployment also fell by 37,000, a much weaker fall of -1.5%.

Yet, the jobs market was much weaker in Scotland. Employment fell by 24,000, or -1%, in Scotland. But in the UK net new jobs were created. Employment rose by 90.000 in the UK. An increase of 0.3%.

So, falling unemployment in Scotland provides an illusory view of the absolute and relative state of the Scottish labour market.

It is also incorrect for the media to report the latest statistics as yet another fall in unemployment in Scotland as the BBC did here. In the data published last month a fall of 19,000 was reported. Now there is a fall of 14,000. But we are dealing with quarterly data not monthly data. The latest quarterly data published today compares the quarter September to November with the previous June to August quarter. Last month's data compared August to October with the previous quarter. Hence in the quarterly data published this month and last month, two of the three months are the same: September and October! The latest figures add November and exclude August.

So, while unemployment fell this quarter, it rose by 7,000 in the previous quarter after falling successively by 3,000 and 13,000 in the two quarters before that.

However, as I noted in earlier posts on the Scottish labour market - here and here - one reason for the apparently stronger unemployment performance in Scotland has been the rising number of inactive workers. In the latest quarter the numbers inactive in Scotland rose by 42,000 or 2.7%. In the UK in contrast the inactive number rose by absolutely less, 39,000, an increase of only 0.2%.

My hypothesis is that the rising inactive numbers in Scotland is a consequence of disproportionate weakness in the Scottish jobs market. Workers are discouraged by the lack of available jobs to cease looking for work and leave the labour market.

If, as before, I assume that the labour market was in equilibrium at the start of the recession then we can compute a 'real' level and rate of unemployment by adding back in this 'discouraged worker' effect. This is done in the chart below.

The hypothesised 'real' level of unemployment is some 80,000 higher than the official rate and on a rising trend.

It is what is happening in the jobs market that, I think, explains this rising trend in 'real' unemployment.

The latest fall in employment is included in the chart below which shows Scottish employment since the start of the recession.

With the latest data, Scottish employment is 96,000 or -3.7% below its pre-recession peak. It currently is only 23,000 above the trough of the 2008-2010 recession. Any recovery that there was in Scottish jobs faltered after the March - May 2011 quarter and has essentially stagnated ever since.

However, that is not the end of the story because it gets worse!

The working population is rising in Scotland so if you express employment over the total number of workers economically active and inactive we get the next chart.

The situation is now worse than at the worst of the recession with employment- working population ratio now -5.7% below its pre-recession peak compared to -5.6% in the trough of the recession.

I know that we must not put too much store by one month's or one quarter's figures. I know also that the Labour Force Survey has a fairly small sample and so is subject to sampling errors which are large.

Yet, my judgement leads me to believe that what we are dealing with here is not measurement error but a real problem in the Scottish jobs market.

 

Hope from the Scottish Housing Market?

I don’t purport to be an expert on the Scottish housing market. But I did notice an interesting piece of evidence when perusing the latest House Price Index data from ONS published on 18 December last year.

The chart below shows the mix-adjusted housing prices monthly from 2002 for the UK countries relative to the UK. The data are not seasonally adjusted, which should be ok if seasonality is similar across countries in UK.

The chart highlights one or two interesting facts.

First, there is the significant absolute and relative boom and collapse in Northern Ireland house prices. Moreover, the recession in the Northern Ireland housing market appears to be continuing.

Secondly, the position of the Scottish housing market is better. Absolutely and relatively compared to Wales and Northern Ireland; and relative to England.

There is not a lot to shout about here. But if house prices are relevant to the household spending then this is one factor that appears to have been more favourable in Scotland than in the other countries of the UK over the last few years.

The good news appears to run out, though, after July 2011 when there was some subsequent slight deterioration in relative Scottish house prices.

So, I don’t expect much of a relative boost to Scottish household demand on this account over the next few months.