Scottish Economy Watch

No double-dip but UK recovery just got worse

The UK Economic Accounts for the first quarter 2013 were published this morning. The UK media - e.g. here - tended to highlight that revisions had removed the double dip recession in the first quarter of 2012. GDP fell in the second quarter but now appears to have remained flat in the first quarter of 2012 rather than falling.

But to me the real story is that the revisions to the data mean that the recession was worse than previously thought with GDP falling by 7.3% rather than 6.3%. Moreover, in the first quarter UK GDP is now seen to be just under 4% - 3.9% - below its pre-recession peak compared to -2.9% before.

The chart below shows the track in recession and recovery of GDP at basic prices and at factor cost.

GDP at factor cost = GDP at market prices - indirect taxes + subsidies, whereas GDP at basic prices excludes taxes less subsidies on products (taxes on products include VAT and excise duties) but includes taxes and subsidies on production other than taxes and subsidies on products.

Any variation between the two measures will reflect changes in taxes and subsidies on production.

With these net taxes removed, and therefore using the measure of GDP at factor cost, we see from the chart that the scale of the recession becomes slightly worse at -7.6% below peak. And the current shortfall below the pre-recession peak of -4.8% is much worse than the position measured in basic prices of -3.9%.

The Chancellor may believe correctly that he has won the argument on austerity with the voters but the data show how specious that claim is.

And a final Scottish thought.

If Scotland's data remain unrevised for the period then the scale of the recession and the current position in relation to the pre-recession peak is much better here: a drop of GDP in recession of 5.6% compared to 7.3% in the UK and 2.3% below pre recession peak here compared to 4.1% in the UK at the end of the fourth quarter 2012.

Scotland's jobs market - February to April 2013

The latest labour market data published today provide further evidence of improvement. Employment rose by 47,000 in February - April compared to the November - January quarter, and unemployment fell by 6,000 to 194,000, a rate of 7.1%. The numbers inactive also fell by 37,000, suggesting that people may be coming back into the labour market.

Over the year, jobs rose by 43,000, unemployment fell by 25,000 but the numbers inactive remained unchanged.

The UK also experienced a rise in employment of 25,000 and a fall in unemployment of 5,000. But the numbers inactive rose by 40,000. Given the relative size of the two economies, the improvement was clearly greater in Scotland in the quarter than the UK.

But as I noted here I suspect that some of the recent stronger jobs and unemployment performance in Scotland could be an unwinding of the effects of the large loss of jobs here between the fourth quarter 2009 and first quarter 2010. GDP performance in Scotland and the UK is very similar, if a little weaker, as shown by the Fraser of Allander Institute's Economic Commentary which we published today - see my blog and here.

The latest figures on employment for Scotland are shown in the chart below

Employment in Scotland in Scotland is now -0.8% below its pre-recession peak. But this is still a weaker performance in the recovery than the UK where jobs are now +0.6% above their pre-recession peak.

We should also note that jobs growth does not necessarily mean a net growth in the demand for labour services. Part-time and self-employment have been rising while full-time employment has been falling. Against this background it is encouraging to see that in the latest release the total number of hours worked in Scotland rose from 77 million to 78 million. And average hours worked rose across all types of employment: full-time, part-time and self-employed. Although, the new data refer to the year Jan 2012 - Dec 2012.

One implication of the large fall in the numbers inactive in the present quarter is that the gap between my estimate of 'real' unemployment and measured unemployment has fallen markedly - see here - as this chart shows.

Finally, the surge in employment in Scotland has improved the employment population ratio as this chart shows:

But even so at -3.5% below the pre-recession peak the size of labour reserves in Scotland, and the extent of human misery at not having a suitable job, clearly still remains large.

FAI Economic Commentary June 2013

The latest economic Commentary from the Fraser of Allander Institute, sponsored by PwC is published today. We have maintained our GDP forecast for 2013 at 0.9%, the same as our March forecast. For the two years 2014 and 2015, we have revised down slightly our forecast for 2014 from 1.7% to 1.6%, and have revised up the forecast for 2015 from 1.9% to 2.1%. The chart below illustrates.

The forecasts reflect the continued weakness of domestic demand, in particular government spending and consumer expenditure, and weak anticipated growth in the rest of the UK and Eurozone markets to which Scottish exports are so reliant.

Clearer signs of a recovery are now emerging within the Scottish economy. But the Institute notes that despite the recent good survey evidence the recovery, so far, is weaker than would be expected 5 years after a recession, even a recession generated by a banking crisis. The reason for this, the Institute argues, is twofold: the UK government's fiscal consolidation programme and a weak export performance reflecting both supply-side structural problems in the UK and Scottish economies as well as weak global demand.

Greater detail is given below

GDP and Output

• The latest Scottish GDP data for the fourth quarter of last year show that Scottish GDP rose by 0.5% in Scotland in the quarter, while falling by -0.3% in the UK.
• After the latest data Scottish GDP stands at -2.3% below its pre-recession peak, slightly better than the position of UK GDP, which continues at -2.9% below its pre-recession peak.
• But once declining oil and gas production is removed - offshore activities are not included in Scottish GDP data but they are in the UK data - we find that Scottish and UK growth is largely identical. Moreover, in 2012 GDP ex oil and gas grew at 0.5% in the UK compared to 0.3% in Scotland.
• By the fourth quarter last year GDP ex oil and gas was -1.9% below its pre-recession peak in the UK compared to -2.4% for Scotland.
• There is evidence of recovery in the business services sector, in particular. By the end of the fourth quarter 2012 GVA in the sector stood 5.1% above its pre-recession peak.
• It is also evident that while real estate activities, accounting for just under 40% of business services, have recovered to stand at around 2.5% above pre-recession peak output, the remaining 60% element of business services - professional, scientific, administrative & support services, has been growing the fastest with GVA reaching nearly 6% above its pre-recession peak by the end of last year.
• Financial services are a cause for concern. GVA in the sector has now fallen more than 17% below its pre-recession peak, a loss of around one sixth of total output in the sector. There seems a strong likelihood that some of this lost output may never return.
• The production sector is buoyant but it would seem largely for one-off technical reasons affecting energy supply.
• Scottish manufacturing GVA now stands at -5.5% below the 2008-09 pre-recession peak. 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.
• This is reflected in the export performance of Scottish manufacturing where exports abroad (ex rUK) fell by 1.4% in the fourth quarter of last year so manufactured exports now stand 13.1% below their pre-recession peak.

Labour Market

• Conditions continue to improve at a faster rate than GDP, suggesting deterioration in productivity.
• In the quarter January to March there was a 54,000 surge in employment in Scotland and unemployment fell to 7.3%.
• But the ratio of employment to population is still -4.3% below its level before the recession. This suggests that the size of labour reserves in Scotland, and the extent of human misery at not having a suitable job, remains large.

Forecasts

• Aggregate data show that with weak export and investment data, there is little evidence of a rebalancing of the Scottish economy away from domestic private and public consumption spending to external private and domestic investment spending.
• Such a rebalancing is seen by many as a pre-requisite for a strong recovery.
• Against this background we have maintained our GDP forecast for 2013 at 0.9%, the same as our March forecast.
• For the two years 2014 and 2015, we have revised down slightly our forecast for 2014 from 1.7% to 1.6%, and have revised up the forecast for 2015 from 1.9% to 2.1%.
• The forecasts reflect the continued weakness of domestic demand, in particular government spending and consumer expenditure, and weak anticipated growth in the rest of the UK and Eurozone markets to which Scottish exports are so reliant.
• Projected net job creation is 12,150 in 2013, rising to 28,200 in 2014 and 38,700 in 2015.
• Unemployment (ILO) is forecast to be 213,250 at the end of 2013, rising to 228,000 by the end of 2014 but then falling back to 189,350 by the end of 2015.

 

Wealth, inequality and tax (sort of!)

Yesterday, 8 June, my son, daughter and I walked down a Byres Road in Glasgow bathed in glorious sunshine. My young son Michael is mad about sports cars and Ferraris. As we ambled along suddenly we saw this beautiful red Ferrari. "Dad take a picture with your 'phone!" Which I duly did. And here it is.

But then I noticed this.

Makes you think.

Friday Music: Sunny Scotland - Brian Cunningham

 

Appropriate on a rare sunny day like today. Filming and original acoustic guitar by BJ Cunningham

More on new Scottish businesses

I published this blog earlier today on the latest data for new businesses in the first quarter this year released by the Committee of Scottish Bankers. Having researched in the area of new firms using VAT registrations I thought I'd look at that data to see if it differed from the Scottish bank account data on new firms.

We can obtain VAT/PAYE new registration data from the Business Demography Release published by ONS. The latest is here.

The VAT/PAYE data are annual and overlap the Scottish Bank data from 2004 to 2011. The chart of the two series is here.

What is interesting about the two series is that they behaved similarly until the trough of the Great Recession but have diverged since. The bank series continued to fall in the subsequent couple of years while the VAT/PAYE series rose.

I have no explanation why the series began to diverge, or as to which series might be considered best. Although my intuition tells me that the VAT/PAYE data may be best. All new businesses seem likely to have a bank account but may be too small in turnover terms to register for VAT or may not have employees. Hence you might expect the number of bank account based new firms to be greater than the VAT/PAYE businesses. This proved to be the case prior to the recession. But not after. So, it seems possible that the bank series could be falling in part because the share of new firms banking with non-Scottish banks, non-bank financial institutions, or using a non-business bank account may be rising.

One alternative possibility is that the VAT registration data is capturing a greater number of new firms because turnover is on average rising faster than the rise in the turnover threshold. Between 2009 and 2011 the VAT registration turnover threshold rose from £67,000 to £73,000. But this was a time of recession and weak recovery so this seems to be an unlikely reason for the measure of new firms to rise.

Whatever the explanation for the divergence between the series, it is worth pointing out that the VAT/PAYE series offers a rosier picture of new businesses in Scotland. It is not so significant to argue that there is a new entrepreneurial 'buzz' in Scotland. But they do show that the share of new businesses in Scotland to the UK has been on a rising trend since 2004 as the chart below shows.

So, some better news on a lovely sunny day!

Little cheer from pickup in new businesses

The data for new businesses in the first quarter this year were released today by the Committee of Scottish Bankers. 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 chart below incorporates the new data.

The number of new businesses rose from 2,716 in the final quarter of last year to 2,974 in the first quarter of this year. The data are not seasonally adjusted so the red line in the chart takes a four-quarter moving average. The moving average continues to be move down. So the extra firms were not sufficient to buck the downward trend.

In the latest data, the number of starts is 52 percent below the (smoothed) pre-recession peak compared to 47 percent in the fourth quarter. Alternatively, the latest numbers are 42 percent below the average quarterly starts in the period before the recession started, compared to 35 percent in the fourth quarter.

The pickup is welcome. But it is slight.

Let us hope, though, that it is the first sign of a turn around as the economy improves.