Scottish Economy Watch

Scottish recovery strengthens in 3rd quarter 2013

The latest Scottish GDP data for the third quarter of last year show that the recovery of GDP strengthened. GDP grew by 0.7% in the quarter, a little weaker than the UK where GDP growth hit 0.8%, but stronger than growth in the previous two quarters of 0.6% and 0.4%, respectively.

The Scottish economy has now exhibited positive growth for the past 6 quarters, indicating a sustained recovery, if still much weaker than recovery from previous recessions.

The chart below shows where GDP in the Scottish and UK economies now stands in terms of recession and recovery.

GDP is still -0.9% below the pre-recession peak, while UK GDP, where the recession was bigger, is -2.5% below the previous peak.

Over the year to the third quarter - four quarter on four quarter - Scottish GDP has grown by 1.3%. If the recovery continues to strengthen and growth reaches 0.8% in the fourth quarter then growth in 2013 will be 1.9%. This is higher than our current forecast of 1.3% and higher than any other Scottish forecaster - see my last post.

In the latest quarter, growth was fairly evenly spread across key sectors with the production sector growing by 0.6%, manufacturing within it growing by 0.7%, and construction and services growing by 0.7% respectively. The growth of manufacturing might suggest that exports are picking up. But the sector still remains -4.6% below its pre-recession peak.

Compared to the UK, the recovery in construction is much weaker here, agriculture, forestry & fishing is exhibiting much stronger growth here, production is growing a little more strongly and services is a little weaker. The chart below shows the comparison

It now looks likely that Scottish GDP will get back to the level it attained before the recession in the first quarter 2014 - six years after the start of the recession. We, that is the FAI, had previously forecast this milestone would be attained round about the third quarter of 2014, so the recovery has clearly been stronger than we anticipated when we made that forecast in 2012.

 

The FAI and Tony Mackay

The Sunday Herald yesterday published a leader in which Inverness-based economist Tony Mackay accuses the Fraser of Allander Institute (FAI) of ridiculing his forecasts of the Scottish economy. I reprint the short piece in full below

The latest edition of Tony Mackay's useful monthly Scottish Economy report points out his forecast that Scottish GDP would increase by +1.5%, seems to have proved accurate, adding: "Our optimistic forecast was ridiculed by some, notably the Fraser of Allander Institute (FAI), which predicted very little growth."

Professor Brian Ashcroft of the FAI responded: "I'm not sure what he is talking about. I certainly have never ridiculed anybody's forecast. Nor do I believe anyone else in the FAI did."

But Mackay claims to have heard three separate reports of an FAI economist dissing his forecasts: "They have done that quite often over the last few years."

And he said that the FAI is generally pessimistic in its forecasts for the Scottish economy, adding: "Brian is clearly very pro-Labour, which is why their recent forecasts have been so pessimistic. Their last Quarterly Economic Commentary might have been guest edited by Ed Balls."

There seems to be two issues here. One, the accuracy of forecasts and two, claims about motivation.

First, on the facts, we - the FAI - were forecasting 1.3% real GDP growth for 2013 at the end of 2012. We revised this down to 0.9% in March reflecting the apparent weak performance at the beginning of the year. We held the forecast at 0.9% in our June Commentary. We revised up our forecast to 1.3% again in November. But Tony Mackay was forecasting 2013 growth of 1.5% in July and he must be commended for this. The strength of the UK recovery from early to mid 2013 caught almost everybody by surprise. But Tony can legitimately claim to have done better than us and most other Scottish and UK forecasters. Of course, we only have data currently on the first two quarters of Scottish growth. Given the UK performance in the third quarter and later survey data it would appear that growth of 2% or more is possible in 2013. 2% is a third higher than Tony Mackay's forecast. As it stands his current forecast is only slightly higher than ours for 2013 and both could well be lower than the final outturn data. But we don't know yet until the data are published over the next six months.

I am perfectly happy to accept that sometimes other forecasters will do better than us for any given year. We do have a fully specified model of the Scottish economy but clearly judgement always plays a role. However a forecaster should be judged not on one forecast but on his performance over time. The FAI publishes the mean absolute error of our forecasts and uses them to define a range in which the forecasts for the future years are likely to fall. They are published with each forecast and the forecast errors are updated regularly. Grant Allan published a paper in the November 2011 Commentary assessing our forecast accuracy back to 2000. I am not aware that Tony Mackay adopts the practice of statistically appraising his past forecasts and then publishing the results.

As my response to the Sunday Herald states I have no knowledge of any member of the FAI ridiculing Tony Mackay's forecasts of the Scottish economy. I have adopted a practice of not criticising any forecasters output because I am aware of what a difficult business this is. All forecasts are mostly incorrect, the issue is how incorrect! Moreover, we are never certain how correct a forecast is because the data is frequently revised for many years after and sometimes drastically. But Tony Mackay not only accuses the FAI of producing a poorer forecast than his own - even before we have the data for 2013 - but goes further and accuses me of political bias, indeed that I am "pro-Labour."

I can assure Tony that any political sympathies I have do not get in the way of my judgement of the performance of the Scottish economy. If I am influenced in my views of the operation of the macro economy and the role of policy it is by world-class new Keynesian economists such as Paul Krugman, Simon Wren Lewis, Larry Summers, Brad Delong, and Michael Woodford and not Ed Balls.